London ruling to drive PNG's LNG future
While the oil price collapse is the number one problem for producers everywhere, the outcome of an obscure arbitration process in London will have more influence on the future of Papua New Guinea's Oil Search.
The ruling on the squabble between Oil Search and US-listed InterOil over pre-emptive rights in the huge Elk-Antelope gas resource will have ramifications beyond those companies. The prospects in PNG of French oil major Total also hinge on the outcome, as does the future shape of the country's liquefied natural gas sector.
With the decision due by March, pressure is building from the PNG government for swift progress toward an LNG expansion in the country.
A deal signed last month between the government and ExxonMobil paved the way for a third train at the US giant's new $US19 billion ($24 billion) PNG LNG venture using gas from the P'nyang field. But Elk-Antelope is widely regarded as the most economic of potential LNG ventures in Asia, and possibly worldwide.
It's no surprise the government wants progress on one of the few projects that still stacks up in a low oil price environment, to build on the economic transformation already under way, thanks to PNG LNG.
But the ruling, when it comes, will still leave many avenues open.
At stake is the ownership and structure of the LNG project that will tap Elk-Antelope, put at between 3.5 trillion and 12 trillion cubic feet of gas.
In short, Oil Search maintains that a $US400 million deal, last March, by InterOil to bring Total into the PRL 15 venture that holds the gas field, violates its pre-emptive rights - acquired shortly before through a $US900 million buyout of venture minorities.
InterOil, led by former Woodside executive Mike Hession, argues otherwise.
Should the judgment favour InterOil, Total looks set to take the role as operator of Elk-Antelope, in line with its ambition to operate an LNG project in the prime Asian market.
The question then becomes whether Total proceeds with a stand-alone LNG plant for Elk-Antelope, or whether it can reach a deal to share infrastructure with ExxonMobil. Elk-Antelope gas could then be processed at PNG LNG's site north of Port Moresby.
Oil Search managing director Peter Botten maintains that $US3 billion of savings are at stake if a deal can be struck. Not all agree. Macquarie Wealth Management suggests Total's fast-track timetable for Elk-Antelope, targeting a go-ahead on a green-field LNG project by mid-2017, has eroded the schedule and cost advantage of a brown-field expansion of PNG LNG.
Certainly, the track record of oil majors negotiating infrastructure sharing and gas tolling suggests such a deal would take time to nut out, if it were even possible. Exxon has little motivation in making it easy for Total. The volume of gas determined to be in Elk-Antelope will be key.
Should Oil Search win in the arbitration, expect some interesting action. Oil Search would pre-empt and take the Total stake for itself for the agreed $US401 million but would look to on-sell it to a major capable of operating Elk-Antelope LNG. With Exxon already having bid at least twice for the resource and Total keen, competitive tension is guaranteed.
Sorting the muddle swiftly is crucial. Not only the PNG government but InterOil and Oil Search are banking on the growth Elk-Antelope will provide.
The influence of PNG's government cannot be overlooked. Judging by Prime Minister Peter O'Neill's effusive send-off this week for Total's retiring Asia-Pacific head Jean-Marie Guillermou, he is very keen to see the French major involved alongside Exxon in the sector that has become the mainstay of the economy.
