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InterOil chief positive about PNG’s role as LNG provider, despite oil price fall

Papua New Guinea is well positioned to benefit from rising LNG demand, despite falling prices, InterOil’s Managing Director Michael Hession tells Business Advantage PNG.

InterOil’s Hession has told Business Advantage PNG he doubts the recent fall in global oil and gas prices will affect InterOil’s plans for the prospective second LNG project, the Elk-Antelope fields.

‘We don’t expect near-term production revenue to be affected by falling oil prices and LNG production from Elk-Antelope is scheduled for early the next decade by which time most analysts believe the oil price would have recovered.’

The latest Pacific Quarterly from ANZ Bank warns prices should fall roughly 40% over the medium term:
‘Brent prices are typically an important input into the contract price of LNG imports for Japan and lower Brent prices suggest lower LNG import prices.

‘Given that PNG’s LNG has been contracted to China, Taiwan, and Japan, their price will be based off Japan’s LNG pricing mechanism.’

Competitors

Hession says low oil prices are likely to eliminate higher, marginal LNG competitor projects—leaving the field open for low-cost Asia Pacific projects like Elk-Antelope.

‘Elk-Antelope sits on the doorstep of Asia, the world’s largest LNG market, and we are poised to take advantage of our proximity to markets.

‘It is closer to the coast and Port Moresby than other major gas fields in PNG and it is close to a major river, an important cost benefit when transporting people and equipment.

‘The gas field is in a less-mountainous region than other major gas fields, a big factor in development cost, and, it is within Papua New Guinea’s least populated province, a key factor in negotiating land access.’
Impact of lower prices on PNG

‘The impact of the falling oil price fall is multi-layered,’ points out Victor Shubin, General Manager of Kina Funds Management.

‘While the price of LNG is correlated to the price of oil, it is not one-to-one.

‘So the price of LNG did not actually halve. It’s now around 8-9btu from 11btu a few months ago so it’s not a direct relationship.

‘It’s not exactly negative for PNG because the PNG LNG project managers can increase the volume of production. So they can compensate.

‘The decline in oil prices will have a positive impact on the economy because it translates to reduced fuel costs for consumers and hence boosting discretionary spending.’

Drilling success

Drilling at the Elk-Antelope gas site in Papua New Guinea’s Gulf Province has boosted hopes it will be big enough to build the country’s second LNG plant.

InterOil reported last week its Antelope-5 well had struck gas about 230 metres closer to the surface than expected, indicating extracting gas could be cheaper than earlier expected.

Citigroup analyst Dale Koenders also says the field could be bigger than anticipated.

He told Fairfax newspapers, the market was assuming a resource of 7.1 tcf for Elk-Antelope, which is the base case being assumed by InterOil, and that the latest drilling result was supportive of that estimate.

The discovery follows an independent arbitration upholding InterOil’s decision to sell a gross 40% shareholding in the Elk-Antelope LNG project to French super major, Total SA.

‘With that matter settled, the venture is committed to developing Elk-Antelope as quickly and efficiently as possible,’ says Hession.

Reorganisation

InterOil has undergone a major reorganisation in the past 12 months, changing its management team, divesting itself of its downstream assets in PNG and focusing instead on exploration and the development of Elk-Antelope project.

‘Our strategy is simple and focused–we find hydrocarbons, monetise and develop them, and then do it again,’ says Hession.

‘In 2014, we prepared for growth. We renewed our management team, streamlined our business, focused on monetising our gas resources, and began renewing our board.

‘Second, we focused on effectively and efficiently developing Elk-Antelope – potentially the lowest-cost LNG project in the Asia-Pacific.

‘Third, we remain focused on financial discipline and have a strong balance sheet with cash in the bank and very little debt.

‘Finally, our deal with Total provides for additional cash on certification of Elk- Antelope gas volumes, which is expected in the second half of 2015.

‘If 2014 was about us focusing the company and freeing us from distractions, 2015 is about delivery.’

Rising gas demand

Expectations of rising energy demand are underscored by the latest edition of ExxonMobil’s ‘Outlook for Energy’, which suggests that global demand for energy is expected to rise by 35% from 2010 to 2040, or by an average of 1.4% a year.

Natural gas is expected to be the fastest-growing major fuel source with demand increasing by about 65 percent, half due to demand from Asia, led by China.

‘By 2040, natural gas is expected to account for more than a quarter of global energy use, surpassing coal in the overall mix,’ says the report.

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