InterOil: A fraud or sleeping giant?

PHIL Mulacek, the maestro behind InterOil Corp’s meteoric rise to prominence, must be punching the air and telling some Americans to go and jump in the Mississippi River. 
He is a new kid on the Papuan exploration blocks, a ‘new kid in town’ so to speak; and some called him a cowboy who is creating a frenzy of excitement on the stock market. 
Junior hydrocarbon boys do not normally strike it rich overnight. Interoil fits that bill, is not just a babe in the business having entered into the PNG companies’ registry 1994 as a fuel
refiner.
The hugely expensive and risky upstream oil and gas exploration business and the downstream production and export game is an exclusive club for the big boys.
Back then, despite the presence of Chevron in Kutubu, PNG was virtually unknown and Phil Mulacek was struggling to make money at his fuel refiner across the Fairfax Harbour from Port Moresby.
Some see InterOil as another Enron, an energy giant that went bust in 2001 after gaining a massive monopolization on the stock market by reporting resources that did not exist. There are Enron remnants with small shares in InterOil.
There are still others who like to compare InterOil with Bre-X, a gold explorer that reported making a huge discovery of large deposits somewhere in the Indonesian jungles by salting drill cores with gold dust. The geologist who led that scam jumped out of a helicopter into the Asian jungles and was never seen again.
There is an internet website called: InterNoOil.com created by US-based Fraud Discovery Institute run by reformed felon, Barry Minkow, that claims InterOil is a fraud. Minkow is normally hired to probe into alleged scams and report his findings and it would be interesting to know who paid him to investigate InterOil.
The pessimism and intrigue is strengthened by a standard forward-looking statement that always accompanies all InterOil announcements to the stock market as required by Canadian law. It says in part: “We currently have no reserves as defined in Canadian National Instrument 51-101 Standards of Disclosure for Oil and Gas Activities. All information contained herein regarding resources are references to undiscovered resources under Canadian National Instrument, whether stated or not.”
This appears to be a reporting requirement created to safeguard the unsuspecting investor in case of a repeat of Enron and Bre-X.
Enron and Bre-X did not have the kind of scrutiny that InterOil has today. Their geographical locations were obscure whereas InterOil’s location of its exploration, drilling and discovery are clearly defined and registered with the Department of Petroleum and Energy and its Registrar of Tenements.
While there is a level of pessimism within some quarters of government and industry, that remains a backroom back-chat against InterOil which has strategically involved Prime Minister Sir Michael Somare in a number of its public announcements, so much so that it would be foolish to even think that InterOil is a fraud.
There are a number of Sir Michael’s cabinet Ministers who are intensely opposed to InterOil’s bid for a second LNG processing plant in PNG and would prefer a ExxonMobil- led PNG LNG project.  
But the knockers do not know Mulacek’s ability to drive his agenda. He has been described as a “uniquely intense and driven businessman” and a bit of cowboy who likes to get things done.
InterOil is also backed by George Soros, a Hungarian-born US billionaire investor who is indirectly link to the President Barack Obama’s election win.
InterOil has obtained millions of dollars in loans from Clarion Finanz AG, the investment firm of Carlo Civelli, a Swiss businessman who has worked with Mr. Mulacek since 1996 as an investor or adviser.
That relationship with Clarion was further cemented this week with the announcement of one Mr Henry Aldorf as President of Pacific LNG Operations Ltd and a director of Liquid Niugini Gas Limited which will develop the InterOil-led gas project.  Pacific LNG Operations Ltd is an affiliate of Clarion Finanz which has substantial interests in the Elk and Antelope discoveries  and 47.5% of Liquid Niugini Gas Limited, a company statement said on Tuesday.
When InterOil made its first gas discovery in 2006, newspapers and major oil and gas players treated it as a relatively obscure Houston company which was linked to remnants of Enron.
Phil Mulacek made a kind of announcement that attracted interests of financiers. With an oil refinery operating across the harbour from Port Moresby, Mulacek announced that the potential of the gas discovered in the Upper Purari River area, not too far into the mountains west of Port Moresby, was so huge that it was potentially larger than the United States’ total residential consumption of the fossil fuel in 2005.
He told an analyst at the time that the size of the discovery was so large that simply controlling its output was sort of like trying to stop the Mississippi.  This is the kind of comments analysts and financiers crave as it creates an upward swing on stock market price
“Just a few years ago, such proclamations — and the executives who made them — might have been viewed as curiosities, if they were noticed at all. Energy prices were so low that many natural-gas discoveries were burnt off so that drilling rigs could extract precious oil deposits further below. Rattled investors might have been wary of any company linked to Enron, especially one like InterOil that was boasting possible treasures unearthed in remote jungles,” The Australian newspaper said in an article in 2006.
But that was then. This is now. 
After a lengthy dormant spell, the global search for gas and oil has reignited with a fervor that is transforming companies like InterOil into Wall Street darlings.
“The gold rush is back on,” said Andrew V. Boland, an energy analyst at Peters & Company, a Canadian investment firm. “It’s like the wild, wild West, all over again.” 
InterOil’s gas find — which is unconfirmed and may be impossible to transport — caused the company’s stock price to soar and its market capitalization to swell to $572 million from $891 million within three weeks of the announcement.
Many of InterOil’s financial backers, including Merrill Lynch, Morgan Stanley, Goldman Sachs, Wells Fargo, and Boone Pickens’s investment firm, increased their bets after the discovery was revealed.
Stanley Druckenmiller, a former lieutenant of George Soros, disclosed three days after the announcement that his hedge fund had poured more than $30 million into InterOil stock,” The Australian reported in 2006.
Merrill Lynch has since pulled out from backing InterOil in 2008.
While InterOil may seem like a small player, compared to large operators like ExxonMobil and Chevron, the possibilities for riches and influence are even more intoxicating.
“I knew from the start this company would be great,’’ said Wayne Andrews, an analyst at Raymond James was reported as saying.
‘’These guys have moved mountains. They’re working in an area with huge documented reservoirs of crude oil and natural gas. This is how fortunes are made.’’ Andrews’ comments to The Australian were not wrong.
Today, the same Andrews is the Vice President (corporate marketing) of InterOil and is leading the campaign for Mulacek based out of Cairns, Australia.
InterOil was granted the second LNG project development approval in December last year, only days after ExxonMobil’s final investment decision (FID) was sanctioned by the PNG government for the PNG LNG development.
Critics disagreed at that time with one senior portfolio manager in the at US-based Sprott Asset Management Mr Peter Hodson  reportedly telling the media InterOil was a worry and not everything at the company is as it seems.
“This is a very questionable company … these are not the types of people who are supposed to win the energy race,’’ said Mr Hodson.
But Mr Andrews who was among the Wall Street analysts who consistently  followed InterOil defended the company at the time: “I know it’s controversial, and when people bash the company, I can’t really say they’re wrong, but I think it’s going to be a great investment. It’s happened with other energy explorers before.’’
Editor Matt Badiali of S&A reports and another Wall Street analyst was present at Antelope2 during a gas flare and a test to show Mitsui Petro-Chemical Corp. of Japan the gas flow-rate in December, 2009. The following are some of his notations:
“The heat was so intense it set a couple hundred yards of jungle on fire. Stagnant pools of water began to boil and steam. I was standing in a remote Asian jungle, watching petroleum engineers control a 200-foot jet of flame from a single natural gas well. They were running a test to gauge the well’s potential. The test started with what sounded like a wet cough coming from within the Earth. Then, the noise swelled to a roar… louder than a jet engine. A wave of heat rolled over me as the giant orange flame shot through the jungle. ‘The world’s largest flamethrower,’ I thought to myself.”
“My friend Cactus, a long-time Texas wildcatter, just stared, awestruck. At 705 million cubic feet per day of natural gas, the test set a world record (as certified by the Guinness Book). It nearly doubled the previous world record, set by the same company on its prior well at this site. The test made all of the traveling worth it. To get to the site, I flew 12,000 miles to the small island nation of Papua New Guinea. From the capital of Port Moresby, it took a combination of helicopters and puddle jumper planes to get us all out there. It was a press event. Morgan Stanley analysts. A guy working for George Soros. Dignitaries. Cactus. Me.”
“Why all the fuss? Well, this test – and the company behind it – is at the center of one of the most controversial resource finds of the last decade. The potential here is incredible: A possible 10 trillion cubic feet of gas. The small company that controls this could easily rise 1,000% or more over the coming few years… or go down as one of history’s most egregious stock frauds. I traveled halfway around the world to investigate the bold claim of some of the most famous investors in the world: The company that owns this oil and gas field is a sham. They say the claims of trillions of cubic feet of natural gas buried beneath the wilds of this South Pacific island are lies. They have made substantial financial bets the company will collapse. They are wrong.”