Exxon’s PNG Gas Grab Welcome for Aussie Partners

Exxon Mobil Corp.'s move to snap up more natural gas assets in Papua New Guinea has sparked concern the U.S. oil major is about to leave its Australian partners there behind.
But Oil Search Ltd. and Santos Ltd. needn’t be worried, according to Macquarie’s Adrian Wood, who says they will benefit from an expansion of Exxon’s $19 billion PNG LNG gas-export project regardless of whose gas is fed through it.


Oil Search and Santos own 29.0% and 13.5% of PNG LNG, respectively, compared to Exxon’s operating interest of 33.2%. The foundation stage of the project is due to start producing liquefied natural gas, or LNG, for shipment to Asian customers next year.
Exxon and partners have already found natural gas to support an expansion of the project to three LNG production units, also known as trains, from the two currently under construction.

However, Exxon is poised to strengthen its hand. Last month, it announced it’s in exclusive talks with Houston-based InterOil to invest in the latter’s gas assets in Papua New Guinea.
Boosting its own resources would give Exxon more power to determine when a third train is built and whose natural gas will be processed for export.
That may feed concerns Oil Search and Santos will be left out of a future expansion. Oil Search, in particular, has a lot to lose as it owns 38.5% of the recent P’nyang discovery that could also support a bigger PNG LNG.

Oil Search estimates that P’nyang has about 2.5 trillion to 3.0 trillion cubic feet of gas, a little more than half the 4.0 trillion to 5.0 trillion cubic feet that Exxon estimates will be needed to support a third train. InterOil’s assets, meanwhile, are thought to hold around 4.0 trillion to 5.0 trillion trillion cubic feet.

Mr. Wood says he understands that all partners in PNG LNG will need to approve the use of InterOil’s resources at the facility.

“As a result, any deal proposed by Exxon to incorporate this gas into the joint venture will need to be made sufficiently attractive for both Oil Search and Santos, who collectively own over 42% of the project, to sign up,” Mr. Wood says.

Even a scenario where Exxon forces all of the InterOil gas into PNG LNG would be beneficial, because Oil Search and Santos would nevertheless maintain an exposure, albeit diluted, to new trains offering higher returns. They would also be entitled to compensation from Exxon for a lower equity stake in the first two trains.

Alternatively, Exxon could sell stakes in InterOil’s resources to Oil Search and Santos, allowing the venture to preserve its current equity share in an enlarged project.

That would require Oil Search and Santos to pay for the extra gas.

In Oil Search’s case, Mr. Wood says that could mean a US$1.3 billion price tag to acquire a stake in InterOil’s assets. This would result in a US$1.1 billion funding gap for Oil Search if the payment falls due in the second half of next year.

However, if the payment can be deferred by about a year, cash flowing from the foundation stage of PNG LNG should be enough to cover most of the bill.
“It is difficult to envisage a materially negative outcome for current joint venturers,” Mr. Wood says. He rates Oil Search at Outperform.

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