IHS Global Insight Perspective | |
Significance | The deal is a key component in InterOil’s strategy to monetise reserves from the Elk field and underlying Antelope structure; InterOil hopes the condensate stripping facility will shore up early revenue streams by reducing its refinery import costs and allowing processing of condensate into gasoline (petrol), kerosene, and naphtha for sale in Papua New Guinea and overseas. |
Implications | InterOil is probably hoping that revenue streams from condensate production will increase confidence that it can finance its share of a planned 3.5-5.0 -million-t/y LNG liquefaction facility in Napa Napa. Mitsui is prepared to finance construction of the condensate stripping project if a final investment decision is reached on the project by end of March 2011. |
Outlook | As part of the joint-venture agreement Mitsui has the future option to purchase a 5% interest in the Elk and Antelope field and proposed LNG plant, subject to government approvals, allowing it to benefit from LNG sales over the long term. |
Condensate Deal Sealed
InterOil Corp. and Japan’s Mitsui & Co. Ltd. have finalised a joint venture operating agreement (JVOA) for a proposed condensate stripping plant to handle output from the Elk and Antelope fields in Gulf province, Papua New Guinea. The agreement replaces a preliminary JV deal announced in April 2010 (see Papua New Guinea: 16 April 2010: InterOil Strikes JV Deal with Mitsui on PNG Gas). Under the JVOA Interoil and Mitsui will each have a 50% interest in the condensate stripping plant, although the state of Papua New Guinea has a statutory right to acquire up to 22.5% in the project. InterOil hopes the plant will have a design capacity of approximately 400 mmcf/d of wellhead gas and will produce 9,000 b/d of condensate, which will be transported via barge to InterOil’s refinery in Port Moresby, the capital, for processing and sale. Under the deal Mitsui will arrange or provide financing for 100% of the plant, which is estimated to have a capital cost of US$550 million, with around US$32 million going towards front end engineering and design (FEED) work, which reportedly commenced in May 2010. The condensate stripping plant is expected to be operational by no later than mid-2013. Mitsui is prepared to bear the costs of the condensate plant but has been careful to specify in the JVOA that it is eligible for reimbursement if, for any reason, a final investment decision (FID) is not reached by the end of March 2011.
The deal is a key component of InterOil’s strategy to monetise reserves from the Elk field and underlying Antelope structure, which on a 2P (proven and probable) basis were put at 2 tcf of gas and 37.5 million barrels of condensate, according to IHS Global Exploration and Production Service (GEPS) in May 2009. InterOil is hoping to boost these reserves further as they look rather low to feed the initial 3.5-5.0 -million-t/y LNG facility. Releases from InterOil in December 2009 suggest that the company believes its acreage holds significant additional potential with estimates that contingent or unconfirmed gas in place could range from between 9.65 tcf to 12.54 tcf. Construction of the condensate stripping facility is designed to support InterOil’s near-term revenue situation. Condensate produced from the fields is expected to reduce crude oil import costs for its 36,000-b/d refinery at Port Moresby by as much as US$1 billion per year, according to previous reports, and could also be refined into diesel or kerosene products for the domestic market or into naphtha for shipment to China or Japan. InterOil may hope that revenue streams from condensate production will help shore up confidence from prospective investors that the company is able to finance its share of the proposed LNG liquefaction facility.
InterOil first entered Papua New Guinea in the 1990s by disassembling an Alaskan oil refinery and rebuilding it in Port Moresby, after which it secured a 30-year agreement with the Papua New Guinean government to ensure that all domestic distributors purchased petroleum products from the facility at import parity prices. Revenues from oil product sales provided a financial base for InterOil to significantly expand its upstream acreage position in Papua New Guinea at a time when the country was overlooked by other oil companies. As of December 2009 InterOil had acquired over 3.9 million acres in onshore petroleum licences, although all are in the exploration phase with no producing fields. Its large onshore portfolio is, therefore, somewhat of a burden on the company to date, although over 40 identified prospects suggests it may hold favourable reserve potential going forward, providing InterOil can gather the cash to complete work commitments on the blocks. Gas and condensate discoveries have been made at the Elk and Antelope fields, but InterOil has encountered monetisation difficulties. Construction of an LNG plant, which would be located adjacent to InterOil’s refinery in Port Moresby, promised a solution for InterOil but the plan has experienced a number of setbacks. The exit of Bank of America’s Merrill Lynch unit from the planned LNG project in February 2010 following the financial crisis forced InterOil to try and find other financial backers for the project, while Papua New Guinea’s government also put the project on the backburner last year as it concentrated on bringing ExxonMobil’s rival PNG LNG project towards an FID. InterOil has, however, received some support from the government, which is ultimately keen to boost revenues from gas extraction and export and in a trip to Japan in May 2009 Prime Minister Somare invited Japanese companies to take out partnership interests in the project (see Papua New Guinea: 22 May 2009: Japanese Investors Invited Into InterOil LNG Project in PNG). Mitsui’s JVOA for the condensate stripping plant does contain the condition that the company has the right to purchase up to a 5% interest in the Elk and Antelope fields and proposed LNG plant, subject to government approvals, which might allow the company to benefit from gas sales over the longer term.
Outlook and Implications
The lack of firm financial foundations for the LNG terminal project may have been a key factor that delayed the finalisation of gas sales and purchase agreements (GSPA’s) with regional buyers, despite rumoured interest from a number of companies including India’s GAIL and China National Offshore Oil Corp. (CNOOC). The condensate stripping plant agreement is a step towards InterOil’s plans to develop the Elk and Antelope fields, although ultimately the FID on the stripping facility needs to be reached before it can be confirmed that Mitsui will actually build the project. For InterOil the agreement with Mitsui should develop its partnership with a company that has significant technical expertise in the LNG liquefaction sector, as demonstrated by its interests in the Sakhalin II, Tangguh, and Qatargas III projects.
Looking further ahead InterOil has ambitious plans to expand the LNG terminal by adding a second train, capitalising on rising gas demand in the Asia-Pacific region. However, achieving this plan appears a distant dream as the first train is still plagued by doubts concerning gas availability. InterOil stated in 2009 that it believed the Antelope-1 well and wells drilled prior to this have confirmed 120% of the full capacity of the first train, which was previously estimated at 500 mmcf/d. When extracting condensate InterOil will re-inject dry gas into the reservoir, thereby saving supplies for the future LNG terminal project. However, while firm proven and recoverable reserve figures from PPL 238 in the Papuan Basin continue to remain elusive, doubts over the ultimate viability of the project will remain from prospective investors and buyers alike.