Papua New Guinea Pioneer Sees $3 Billion Savings on Gas Deal

  • Oil Search says cooperation may lead to substantial cost cuts
  • InterOil deal increases chance of project integration: WoodMac

Oil Search Ltd. is aiming for addition by subtraction in Papua New Guinea.

Its deal to buy up and divide with Total SA the assets held by their partner InterOil Corp. may save the country’s two liquefied natural gas projects as much as $3 billion and speed up development if they cooperate, according to Peter Botten, managing director of Oil Search, which was established in the Pacific nation since 1929.

If the deal is approved, Oil Search would hold a 29 percent stake in the proposed Total-led Papua LNG project. That’s the same share it has in Exxon Mobil Corp.’s $19 billion PNG LNG development, which is considering expansion. Taking over InterOil will make it easier for Oil Search and Total to integrate their LNG plant with Exxon’s project, according to Neil Beveridge, a Hong Kong-based analyst at Sanford C. Bernstein & Co.

“It becomes incrementally easier with three parties instead of four,” Beveridge said. “It wasn’t impossible to align everyone’s interests before, but it was much harder given the misaligned commercial interests.”

While gas-export projects globally are being delayed or scrapped amid a downturn in the energy industry, Papua New Guinea is seen as one of the most promising locations due to lower development costs and gas reserves that also include condensates, a type of light oil that adds extra revenue.

“This deal allows us to influence how Papua LNG and PNG LNG can cooperate,” Botten said in an interview with Bloomberg Television. “There are substantial capital cost reductions and schedule optimization that can be done with cooperation. There’s a lot of value upside.”

‘Highly Practical’

InterOil’s Elk-Antelope assets could provide enough gas for at least one LNG train, or production unit, Botten said. The fields are 340 kilometers (211 miles) away from the proposed site of the LNG plant near the capital, Port Moresby, less than half the distance for the resources feeding the PNG LNG project, according to an InterOil presentation in January.

“Oil Search has always been keen on the two projects seeking ways to collaborate -- or combine -- to reduce costs, so the deal increases the possibility of the two developments integrating,” said Angus Rodger, director of Asia-Pacific upstream research at Wood Mackenzie. “It remains highly practical for Papua LNG molecules to help feed a third and fourth train at PNG LNG, should Exxon Mobil wish to proceed along that path.”

Exxon Mobil is “open to discussing infrastructure sharing opportunities with other operators where it is technically feasible and commercially attractive for both parties,” spokesman Aaron Stryk said by e-mail. Total said in a statement Friday that the deal provides a commitment to maximize the value of the Papua LNG project through cooperation, and possibly integration, with PNG LNG.

If construction of a separate Papua LNG project starts in 2018, it would take until 2022 before first shipments leave the terminal, according to BMI Research. Papua New Guinea exported 8.76 billion cubic meters of LNG last year, a level that should increase to more than 20 billion by 2024, BMI said in a report e-mailed Friday.

Oil Search’s Botten acknowledged that cooperation between different ventures isn’t easy.

“You have to get past corporate egos,” he said.

Before it's here, it's on the Bloomberg Terminal.
LEARN MORE