Wednesday, October 17, 2012

Potential for PNG to own 50% of Elk and Antelope


A joint venture headed by InterOil Corp. (IOC) has offered to sell half of two gas fields it owns in Papua New Guinea to the government and local landowners, in a move that may unlock development of a new US$6 billion-plus export project, according to documents seen by The Wall Street Journal.

Liquid Niugini Gas Ltd., a joint venture led by InterOil, signed an agreement in 2009 with Papua New Guinea to develop a large-scale liquefied natural gas, or LNG, project, but it has since clashed several times with the government over the design of the venture. In May, the government threatened to terminate the agreement, triggering a fresh round of talks.

A letter sent by Liquid Niugini Gas, dated Sept. 18 and seen by The Wall Street Journal, outlined the venture's new offer to overhaul ownership of the Elk and Antelope gas fields and secure a breakthrough in the long-running dispute. It offers to split ownership of Elk and Antelope's resources equally, with InterOil and its partners holding the right to develop the first 4 trillion cubic feet of natural gas and use it to supply their proposed Gulf LNG export facility, designed to produce 3.8 million metric tons of LNG a year.

But in a significant change, the proposal gives Papua New Guinea the right to the next 4 trillion cubic feet of gas supply from the Elk and Antelope fields that it could use for a smaller LNG project as well as meeting domestic power needs. That would give the government and local landholders ownership of 50% of the gas, up from their combined entitlement of 22.5% currently.

"This structure places substantially all risk on Liquid Niugini Gas Ltd. and InterOil for the development of the 3.8 million-ton-per-annum Gulf LNG project," the letter from Liquid Niugini Gas states.

Christian Vinson, director of Liquid Niugini Gas, and InterOil spokesman Wayne Andrews didn't return calls for comment.

Interest in Papua New Guinea is intensifying due to its close proximity to fast-growing Asian economies and several big oil and gas finds. The country is due to become one of the world's newest significant energy producers in 2014 when the ExxonMobil Corp.-led (XOM) US$15.7 billion PNG LNG project starts up.

InterOil wants to build a facility on the Gulf of Papua coastline to export the gas, and last year hired three investment banks to find an investor.

In a separate document seen by The Wall Street Journal, Papua New Guinea's Prime Minister Peter O'Neill and Energy Minister William Duma recommended the National Executive Council--the country's cabinet known as the NEC--approve changes to the Gulf LNG project. It estimates an early decision to start construction of the project is worth more than 16 billion Papua New Guinean kina (US$7.7 billion) in revenues for the state and local landholders, while warning that any delays would raise risks of finding customers for the gas as competition with rival LNG suppliers intensifies.

The draft submission from Mr. O'Neill and Mr. Duma to the NEC also recommends the state begins talks with InterOil and its partners to acquire a larger interest than 22.5% in the Elk and Antelope gas fields "on commercial terms reflecting market value to be agreed with the upstream participants', targeting a binding deal by the end of December.

Mr. Duma said: "We've had our differences with InterOil over the last couple of years. It's becoming a sensitive issue so I wouldn't want to comment on this at this stage."

Papua New Guinea has an estimated 26 trillion cubic feet of natural gas reserves, according to U.K.-based consultancy Wood Mackenzie. Those reserves--roughly equivalent to the amount of natural gas consumed in the U.S. each year--make it an attractive target for international companies seeking projects that can export gas to booming Asian economies such as China or traditional LNG users like Japan and South Korea.

In September last year, InterOil mandated Morgan Stanley (MS), UBS AG (UBS) and a unit of Australia's Macquarie Group (MQG.AU) to bring a company with experience operating large LNG production facilities into the venture. InterOil said then it was willing to sell interests in the Elk and Antelope fields.

Fox Business