Goliaths circle LNG riches

 It’s been a big year for Papua New Guinea. The Pacific island nation, ranked as one of the world’s most lawless, is rocketing into the next phase of economic growth, fuelled by accelerating demand for its mineral and petroleum riches.

But the boom is sharpening tensions among the elite as competition intensifies for its top oil, gas and mining assets.

For much of this troubled country’s recent history, one company has dominated, the Port Moresby-based, ASX-listed Oil Search, headed by Peter Botten.

Australian investors have poured money into this stock over the past five years, fuelling gains of close to 30 per cent.

Yet as the political and corporate landscape shifts, Oil Search faces fresh challenges, not least how to tiptoe between two energy goliaths, ExxonMobil and France’s Total.

Oil Search’s joint venture with Exxon for the US$19 billion (K47.32 billion) PNG LNG project has been the biggest show in town. 

By next year PNG’s rate of GDP growth is forecast to more than treble to 21 per cent in 2015, mostly on exports from the project.

Third train pending

As The Australian Financial Review flagged earlier this month, the venture has two production trains, but a third one is in the works, drawing on gas from the Hides field.

Eventually, it could have up to five trains, fed also by the Elk and Antelope fields, which may contain up to 25 billion cubic metres of gas. 

But this brings Oil Search and Exxon into direct confrontation with a joint venture between Total and InterOil, the resurgent Houston-based company that discovered Elk-Antelope. InterOil’s boss and former Woodside executive, Michael Hession, calls the finds among Asia’s largest in two decades.

As the market awaits further drilling results to shore up these claims, Total has declared it will pursue a second, rival LNG project, raising the prospect of tough negotiations with Exxon over the sharing of infrastructure.

The government appears to have thrown its weight behind this strategy with Petroleum Minister Nixon Duban telling reporters recently in Singapore that his preference is for a second LNG plant. 

Others close to the government insist the minister was quoted out of context, underlining acute sensitivity over the issue.

Battle field

In the meantime, Oil Search and InterOil have been locked in a battle since March when Botten swooped on a 22.83 per cent stake in Elk-Antelope held by minority investor Pac LNG.

The deal sparked a dispute over pre-emptive rights, with a ruling expected in early 2015. Once resolved, PNG’s LNG sector could undergo another upheaval.

David Hewitt, Credit Suisse’s global head of energy research, stresses the stakes are high, with eye-boggling capex costs but lucrative returns on offer. 

“LNG commercialisation is like finishing a Rubik’s cube,” he said. 

“It’s not just a case of finding the gas. We know that there are plentiful supplies. “The difficulty is in bringing all the different aspects of commercialisation together. There are only a few companies that have that skill set.”

Exxon has the advantage given its track record with PNG LNG. 

In a rare feat for the industry, the venture started shipments ahead of schedule, in May.

The venture’s early success has enhanced PNG’s attractiveness for energy majors with speculation persisting about interest from Perth-based Woodside Petroleum, whose chief executive Peter Coleman spearheaded the development of PNG LNG while at Exxon.

A theory holds sway in some corners about a looming takeover play by Woodside for InterOil, although few believe any move will happen before the arbitration has been resolved.

Stock opinions

Meanwhile debate rages as to whether InterOil is already overvalued, although Bernstein, the influential Wall Street research house, recently joined the bulls with an outperform rating on the stock.

Bernstein senior oil and gas analyst Neil Beveridge followed that up last month after a discussion with Hession that he told clients gave “increased conviction” on its rating.

He said a “root and branch restructuring” of the management had enhanced InterOil’s credibility, while the link-up with Total and Oil Search on Elk-Antelope set that venture up as a potential “major LNG export project”.

This mounting confidence coincides with an important pivot in Japan’s energy procurement strategy with Prime Minister Shinzo Abe declaring the country would look towards Australasia for more LNG supplies to avoid security concerns about ships traversing the South China Sea.

Yet as the demand for its resources sends the Pacific island nation of 7 million people on a steep growth trajectory, that has in turn produced widening political divisions and an increasingly restive population, heightening the stakes for politicians and corporates alike.

These risks were thrown in to sharp relief earlier this year by the uproar over the $1.2 billion loan from UBS. 

The government used the money to snap up a 10.1 per cent stake in Oil Search – cash that was in turn used to buy into Elk-Antelope – but Treasurer Don Polye refused to sign off on the loan, claiming Prime Minister Peter O’Neill failed to follow due process.

The controversy has led to a legal challenge with the PM insisting he will defend the government’s actions in court. Despite the heightened tensions, the hope is that PNG may yet escape the so-called ‘resources curse’ that has so blighted other developing nations. 

If it succeeds, its mostly rural population – close to 40 per cent of which live in extreme poverty – and the companies operating there stand to reap substantial gains. – The Australian Financial Review