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InterOil, a ‘drop in the ocean’ IN the world of oil, InterOil is a minnow – somewhat like a tiny fishing boat compared with a supertanker. Multinational oil companies are at least 500 times its size.InterOil is unique because, despite ambitions to be an Australasian company, its operations are totally located in Papua New Guinea. For many years, before InterOil set up its one and only crude oil refinery in PNG – one the MNCs would regard as a mini-refinery – successive PNG governments had been keen to establish such a crude oil refinery. Besides the ability to offset the country’s entire imports of petroleum products, such a refinery was seen as a positive in terms of greater industrialisation. Another regional city that used to pursue a similar goal, and for largely similar reasons, was Darwin, which continues to import its petroleum products largely from refineries in Brisbane or in Singapore. However, there always were concerns about whether a small refinery in this region could be viable and, after InterOil seriously began moves to relocate a fairly new but unused refinery from Alaska to PNG, at least one other Asian contender claimed it planned to set up a refinery in Lae. Lae might have been a better location because of its minerals-rich and heavily populated hinterland. The towns of Mt Hagen, Goroka, the Ramu Valley and Madang are all connected by road to Lae, which also boasts the country’s best shipping port. But Port Moresby had a variety of attractions for InterOil. The Napanapa location was suitable for big tankers carrying crude or petroleum products and the company hoped that somewhere within Gulf or Central provinces, it could make an oil discovery that could easily feed the refinery. To entice InterOil and provide it with some financial security, former governments negotiated a 30-year contract under which the company had the right to price its products at import parity levels, or the equivalent of landed costs of such petroleum products from Singapore. The company was told local customers would be required to purchase their petroleum product needs from the refinery on this premise. The Independent Consumer and Competition Commission had the role of regulating prices, with a major outcry occurring recently when InterOil decided unilaterally to increase its price and to seek negotiations on a new pricing formula. One of the unforeseen problems Napanapa has encountered has been the steady and inexorable increase in crude oil prices. At present, the cost of light sweet crude oil used at the refinery is more than double the average US$42 a barrel Kutubu was fetching when the refinery was under construction in 2004. Logically therefore, the price of petrol, diesel and kerosene in this timeframe would also have more than doubled. When InterOil unilaterally increased the price of its petroleum products just over a month ago, it was faced with the stark choice of facing bankruptcy and liquidation unless it could recoup a fairer return on its operations. The company’s banks had advised the company that unless its petroleum products better reflected the cost of its crude oil feed they were going to withdraw financing for shipping of crude and other operations, forcing a virtual shutdown at Napanapa. The price increase has given the company a new lease of life, pending a three-month review of the 30-year agreement the Government is now undertaking on the pricing formula for locally produced petroleum products. The company was only forced into taking the unilateral action because it had been warning the Government through the Ministry of Petroleum and Energy that it was facing a dire situation for over a year. To all intents and purposes, those pleas appeared to have fallen on deaf years and there have been some suggestions that the company might have got a better outcome if palms had been greased in the process. It was no big secret that the company has been losing money ever since the refinery began commercial operations on Jan 1, 2005. As a publicly listed company on the Toronto Stock Exchange, its quarterly accounts are on the internet for anyone to scrutinise. Its secondary listing on the Port Moresby Stock Exchange has meant these announcements are also simultaneously released to POMSoX. In 2005, the first full year of operations, InterOil lost US$52.9 million. The following year it lost US$39.3 million and last year the loss totalled US$43.4 million. There is no likelihood of a turnaround this year with InterOil announcing a net loss of US$26.2 million in the first nine months. In its 2006 annual report, InterOil noted that the pricing formula used to determine the PNG domestic price of refined petroleum products “does not allow us to recover the increased costs of working capital that result from increases in the cost of crude feedstocks”. While it is possible that a 32,500 b/d refinery in Port Moresby was never viable in the first place, InterOil chairman and chief executive Phil Mulacek has made it clear his company only wants a fair go and is not seeking a subsidy from the Government. The Government has failed on its part to try and protect the domestic market for the refinery by allowing in diesel imports containing a high 0.5% sulphur content compared with the 0.05% content from Napanapa, which both the Porgera gold mine and Lihir gold have been using as a cheaper fuel. There are suggestions that some other products, besides diesel, including gasoline and jetfuel, have been imported from time to time against the spirit and intent of InterOil’s 30-year agreement with the Government. The National last Dec 21 noted that ExxonMobil, the world’s largest oil company, may have had a role in setting erratic prices for posted prices for petroleum products in Singapore, used as a benchmark in PNG and almost nowhere else. These claims have not been denied by ExxonMobil, which like InterOil, is pursuing the construction of PNG’s first liquefied natural gas plant. Mobil has also been the party that has been importing diesel, to the detriment of the Napanapa operation, while the authorities have been standing by twiddling their thumbs, as far as we can see. Mobil has not denied or clarified these accusations so we can only assume they are true. The question remains, as pointed out in that Dec 21 news story, whether these forces would act as a “killer punch” for Napanapa. If the refinery can survive until the Elk gas discovery gets developed, there will be no turning back once condensate from Elk is running through the refinery.
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