Recent projects have piqued investors’ interest in new possibilities

Much of the rapid growth that has occurred over the past decade across a wide swath of Papua New Guinea’s economy has been either directly or indirectly the result of massive investments and projected future earnings of the ExxonMobil PNG liquefied natural gas (LNG) project. As this project prepares for its first delivery starting in 2014, many are looking for the next big resource project to fill the void and fuel a new wave of investment.

The most likely candidate to fulfil this role is the Elk-Antelope prospect within petroleum retention licence (PRL) 15 located in the Gulf Province. Billed as the largest untapped gas field in the country, oil and gas outfit InterOil estimates the project to contain between 6.47trn and 10.44trn cu feet (tcf) of initial recoverable sales gas, along with 105. 3m-151.4m barrels of oil equivalent (boe) of initial recoverable condensate and between 1.18bn and 1.89bn boe of combined initial recoverable resources. To be constructed in phases as more resources come online, the project is projected to have an initial liquefaction capacity of 3.8m tonnes per annum (tpa), with a ceiling of 8m tpa and a possible expansion to 12m tpa, depending on exploratory results.

Let's Make A Deal

The project could prove to be PNG’s next multibillion-dollar gas-export facility. It is being developed in a joint venture between France’s Total, which now holds a 40.1% stake, along with InterOil with a 36.5% share and Oil Search (OSH) holding 22.8%. The pace of development for the venture has picked up momentum, with Total agreeing to pay $613m to InterOil for a stake in the ElkAntelope fields even as exploratory drilling work continues. Depending on the assessment results, the deal could ultimately fetch InterOil as much as $3.6bn if the plays are found to contain enough gas – at least 9 tcf – to support the development of two LNG trains and a processing facility. According to the deal signed in December 2013, InterOil would hold a 30% interest in the integrated LNG development.

Total had moved to secure a deal after earlier talks in 2013 between InterOil and ExxonMobil, which is assumed to be the natural frontrunner due to its participation in PNG LNG, but failed to reach an agreement. Complicating matters further, in 2013 OSH also purchased a 22.8% stake in the fields for $900m from minority partner Pac LNG Group, a move which guaranteed the company a seat at the table that includes the right to pre-empt the agreement concluded by InterOil and Total in December 2013. By using a financial vehicle to sell down a portion of its interest in PRL 15 to Total, instead of selling off a direct stake in the project, InterOil essentially circumvented the pre-emptive rights OSH had to match the offer. These terms of the agreement were later restructured in March 2014 to comply with OSH’s rights in the project, increasing InterOil’s interest to 35.5% of the licence in the process.

Negotiating Terms

After being cut out of the deal, OSH disputed the validity of the InterOil’s March 26, 2014 revision of the deal in which Total acquired a 40.1% interest in PRL 15 located in the Elk-Antelope area through the purchase of all shares in a wholly owned InterOil subsidiary. InterOil confirmed the dispute later in March, telling local press that any efforts to negate the deal signed with Total would be “strongly defended.” For InterOil, the new arrangement means a windfall of $401m from Total for closing the transaction and another $73m upon the final investment decision for an Elk-Antelope LNG project, $65m on the first LNG cargo and lastly payments for certified gas volumes following appraisal of Elk-Antelope. Following the transaction, the ownership structure of PRL 15 broke down to Total’s 40.1% stake and InterOil’s 35.5% share, followed by OSH’s 22.8% interest and 1.6% held by indirect participating interests. Shortly thereafter on March 27, InterOil bumped up its stake again by acquiring an additional 1% of project from independent participating interests, bringing its total share to 36.5%.

Facing Uncertainty

This distribution could well be altered again before all is said and done, however, as the PNG government and landholders of PRL 15 maintain the right to take on a 20.5% and 2% interest, respectively, in any oil and gas project upon the issuance of a development licence. If this does play out and the government is able to raise the necessary money to cover its share of the buy in, the new ownership structure would recue Total’s share in the project from 40.1% to 31.1%, leaving InterOil with 27.5%, OSH with a 17.7% share, the government and landowners with 22.5%, and indirect participating interests holding the outstanding 1.2%.

No stranger to PNG’s natural gas sector, OSH is highly active in the strategically important energy sector and holds a 29% stake in the PNG LNG project. The government also has a vested financial interest in the company after Prime Minister Peter O’Neill announced in March 2014 that the PNG government would purchase just under 150m shares in OSH at A$8.20 using funds raised from a loan from UBS. Previously the government leveraged its earlier holdings in OSH to obtain cash from the Abu Dhabi-based International Petroleum Investment Company for its participation in the PNG LNG project. OSH is already partnered with ExxonMobil in the PNG LNG project, which carried out its first gas shipments in May 2014, a project it has expressed interest in expanding in the past. The proximity and estimated size of the Elk-Antelope play would be a convenient fit for adding additional trains to the existing venture as any future expansion would also tap into the existing pipeline, cargo terminal, gasification facilities and other infrastructure.

Moving Forward

Exploration work on the project is continuing in earnest with InterOil in the midst of a $300m, eight-well drilling campaign as of March 2014 that is projected to carry over into 2015. Although PRL 15 and the Elk-Antelope fields have been the primary focus of exploratory efforts to date, these efforts are being expanded to include the other five adjacent petroleum prospecting licences (PPL) held by InterOil. The government granted InterOil a total of four new PPLs – 474, 475, 476 and 477 – in March 2014 that are valid for six years and cover the same area as PPL 236, PPL 237 and PPL 238, which were previously held by InterOil.

The company initiated three separate drillings in March 2014, the latest of which was the Raptor-1 site located 20 km south-west of Wabo in the Gulf Province and which will be drilled to a total depth of 4500 metres, according to InterOil. The exploration well is being drilled in PPL 475, which borders PRL 15 to the west. The first two wells were the Bobcat-1, which is situated approximately 20 km north of Raptor-1, and Wahoo-1, which is near the coast about 180 km south-east of Raptor-1. Bobcat-1 is situated within the 1.2m-ha PPL 476, and Wahoo-1 is located within the 1.2m-ha PPL 474 along the coast of the Gulf of Papua.

The fourth and final exploration well scheduled as part of the campaign will be Antelope Deep, which will be set up in PRL 15 and is scheduled to be spudded sometime in 2015. Lastly, a total of four more appraisal wells are also planned for drilling over the next two years. These begin with the Antelope-4 and Antelope-5 wells scheduled for the third quarter of 2014 (both located in PRL 15), followed by the Triceratops-3 well (PRL 39) in the fourth quarter of 2014 and Antelope-6 (PRL 15) in 2015. Each well will cost approximately $50m to drill over a 60-90 day period, with the exception of the Antelope Deep well, which is projected to cost around $60m.

Additional Benefits

Along with the exploratory and appraisal programme, a substantial amount of infrastructure will also be required to lift, strip, transport, liquefy and ship the gas and associated condensates. Although the pipeline will not traverse as much ground as the PNG LNG project, which extends up into the highlands, this project still requires a healthy amount of investment. Some of these projects, such as preliminary works needed to develop a condensate stripping plant, were carried out as early as 2010 when InterOil signed a deal with Japan’s Mitsui for the front-end engineering and design stage. Other major construction outlays that will be needed include approximately 120 km each of condensate and dry natural gas pipelines, storage tanks, an export terminal, administrative buildings and other support infrastructure.

Other oil companies have also taken advantage of opportunities and are busy drilling. For instance, Canadian firm Talisman Energy plans to continue seismic acquisition across various blocks with a view to identifying suitable prospects for drilling in the future. The Tingu-1 well drilled in PRL 21 yielded positive results in August 2013 with gas tested at 45m-50m standard cu feet per day and 50-60 barrels of condensate per million cu feet of gas, leading to a major discovery estimated at about 459bn cu feet of gas and 25.6m barrels of condensate.