On the horizon: Investors mull a second massive natural gas project


With the afterglow of the successful implementation of Papua New Guinea’s first major liquefied natural gas (LNG) project now fading, attention has now being turned increasingly towards the next large pipeline project, Papua LNG. The most likely candidates are the Elk-Antelope fields within petroleum retention licence (PRL) 15 located in Gulf Province. Billed as the largest untapped gas fields in the country, oil and gas outfit InterOil estimates the initial Elk-Antelope fields that will supply the project to contain 10.2trn cu feet equivalent (cfe) of initial recoverable natural gas as measured by 2C best estimates.

This initial target could be bolstered by the addition of surrounding reservoirs, which could later be linked in to provide additional stock for trains in future projects. These include the Raptor field located to the south-west of Elk-Antelope, thought to contain approximately 3.6trn cfe within petroleum prospecting licence (PPL) 475, the Bobcat field located to the north in PPL 476 with 2.4trn cfe, the Triceratops field located to the north-west in PPL 39 with 400bn cfe, and another roughly 9trn cfe of gross, unrisked prospective resources in the South Antelope field.

High-Demand Markets

To be constructed in phases as more resources come on-line, the project is projected to have an initial liquefaction capacity of 3.8m tonnes per annum (tpa), with a ceiling of 8m tpa and a possible expansion to 12m tpa depending on exploratory results. Papua LNG is well-located to serve high-demand markets in the region. “The project is onshore, close to the market and I believe it is very well placed,” Philippe Blanchard, managing director of Total E&P PNG, told OBG. “We have optimised the upstream costs close to markets in Asia.”

Although both the PNG LNG and Papua LNG projects are similar, in that they both source gas from the interior of the country, process it and pipe it to the liquefaction plants on the coast for export, there are some very tangible differences. One crucial difference is the current state of the energy market, with demand for and the price of natural gas significantly depressed since the inception of the PNG LNG project. Another difference is the experience gained by the PNG government and the landowners in dealing with large international oil companies. Now that the first project is finished, with Papua LNG each party could hope to gain more advantageous conditions in terms of ownership shares, community investments and guaranteed share of gas production diverted for domestic use, among other incentives.

Sizing Things Up

Initial estimates of the natural gas available for commercialisation were pegged at 5.3trn cu feet, enough for at least one decent-sized train, and have increased from there. While this projection presents a viable starting point, project partners have been immersed in an extensive exploration programme to more accurately determine the extent of the gas deposits lying underneath PRL 15. This geological basin has been determined to be composed of an ancient lagoon and reef system, the characteristics and exact size of which vary in terms of containing extractable natural gas deposits, with the circular lagoon band providing the sweet spot.

After focusing initially on the centre of the resource, scrutiny has turned to mapping out exactly how far out this gas field extends beyond the initial test wells, as seismic searches of the area proved inconclusive. In the Antelope field this entailed the drilling of three new appraisal wells to the south, east and west of the deposit. Antelope 4 was completed at the end of 2015 to help determine the southern extent of the field followed by Antelope 5 to the west, which was finished in the first quarter of 2016. Drilling on the third new appraisal well, Antelope 6, kicked off in December 2015 to the east and was completed in April 2016. This last well revealed that the eastern extension of the field was characterised by geology consistent with lagoon characteristics, which means that the composition of the gas to the east was not as valuable as the reef gas present throughout the rest of the explored area.

With these three appraisal wells now completed in mid-2016, the joint venture partners were debating the need for yet another well (Antelope 7) further to the west of Antelope 5 to better test how far the gas field extends. If approved, drilling on the new well would likely begin before the end of 2016 and be completed by the end of 2017. At this point the venture should have a sufficient amount of data with which to initiate a final investment decision (FID) for the project in 2017. This will in turn trigger entry into the design and front-end engineering phase of the project, expected to take 12-15 months to complete. This timeframe places the project at mid-2018, the point at which the FID is expected. If approved, tenders for initial construction works would likely be issued the same year, with initial LNG cargoes expected to sail by 2022 or 2023.

Value Appraisal

The significant value expected to be derived from PNG’s next great natural gas project has generated a substantial amount of interest from a handful of stakeholders in recent years. As these competing companies vied for position on the project, a cascade of transactions has drawn and redrawn the ownership composition of the shareholders. The players tied to the project include original PRL 15 holders InterOil and Pac LNG Group, long-time PNG-based oil and gas company Oil Search and its PNG LNG partner ExxonMobil, along with France’s Total.

The pace of project development for the venture evolved rapidly in 2013 and 2014, when Total acquired a 40.1% interest in PRL 15 from the purchase of all the shares in a wholly-owned InterOil subsidiary. The deal netted InterOil an initial windfall of $401m from Total for closing the transaction, along with another $73m upon the FID for an Elk-Antelope LNG project, $65m on the first LNG cargo and payments for certified gas volumes following appraisal of Elk-Antelope.

In addition to these one-time payments, InterOil was eligible for a series of variable payouts based on the final size of gas reserves discovered and the future performance of the project. Based on the best certified estimate of 2C contingent resources, InterOil would receive $0.77 per 1000 cfe of natural gas for between 3.5trn cfe and 5.4trn cfe, $1.03 per 1000 cfe for resources between 5.4trn-6.5trn cfe and $1.29 per 1000 cfe for resource exceeding 6.5trn cfe. Another discovery bonus of $65.4m per trillion cfe for volumes over 1trn cfe based on volumes from exploration wells was also written into the deal.

Negotiating Terms

Following the transaction, the ownership structure of PRL 15 broke down to Total’s 40.1% stake and InterOil’s 35.5% share, followed by Oil Search’s 22.8% interest by virtue of its acquisition of Pac LNG Group, with the remaining 1.6% held by indirect participating interests. InterOil was able to bump up its stake again shortly thereafter when in March 2014 the company acquired an additional 1% of project from independent participating interests for a total of 36.5%. This 2014 deal with Total came after no agreement came to fruition from earlier talks in 2013 between ExxonMobil and InterOil. Complicating matters further, in late 2013 Oil Search also purchased a 22.8% stake in the fields for $900m from minority partners Pac LNG Group, a move that guaranteed the company a seat at the table, which includes the right to pre-empt the agreement concluded by InterOil and Total. By using a financial vehicle to sell down a portion of its interest in PRL 15 to Total instead of selling off a direct stake in the project, InterOil essentially circumvented pre-emptive rights Oil Search had to match the offer. These terms of the agreement were later restructured in March 2014 to comply with Oil Search’s rights in the projects, satisfying all parties involved for the moment.

All this jockeying for position between the rival companies, however, was rendered moot in late July 2016, when ExxonMobil agreed to acquire InterOil for more than $2.5bn and for up to $3.6bn – depending on how much potential gas there is at the Elk-Antelope fields, in which InterOil owns a 36.5% stake. This was after an offer by Oil Search for up to $2.2bn bid for the company in May 2016. The transaction also gives access to InterOil’s larger resource base in PNG, which includes six licences in total, covering approximately 1.62m ha.