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InterOil Corporation (ticker: IOC) is developing a vertically integrated energy business focused on assets in Papua New Guinea (PNG). InterOil’s assets consist of petroleum licenses covering about 3.9 million acres, an oil refinery, and retail and commercial distribution facilities, all located in Papua New Guinea.

Deal Finalized…

InterOil announced its partnership in the Elk-Antelope field in Papua New Guinea with Total SA (ticker: TOT) officially closed on March 28, 2014. TOT received 40.1% gross interest to IOC’s Petroleum Retention License (PRL) 15 for a purchase price of US $401 million. Pro forma for the sale, InterOil will retain a 35.5% interest and Oil Search International (ticker: OSH.AX) will retain a 22.8% gross interest. InterOil held a 75.6% stake prior to finalizing the deal and, in addition to the sale, will receive $73 million for a final investment decision, $65 million for the first LNG cargo and additional, unspecified payments for certified gas volumes following an appraisal of the region.

…But not without Drama

The minority holder in the lease of PRL 15, Oil Search, contested the agreement just before it was finalized but did not state its intentions. OSH is engaged in another PNG partnership nearby with ExxonMobil (ticker: XOM) that is expected to commence in 2014. Production capacity is expected to reach 6.9 million tons per year with costs projected to reach $19 billion.

ExxonMobil had previously been convening with IOC to develop a joint venture in the Elk-Antelope field before talks stalled in May 2013. Shell (ticker: RDS.B) joined the race in June 2013. However, Total’s emergence as the victor was somewhat of a surprise since neither TOT nor IOC revealed their intentions. Total already had a presence in the region, including purchasing a 40% stake in PPL 234 and PPL 244 (from Oil Search) in addition to a 35% ownership in the PPL 338 and PPL 339 blocks.

Gas Project Ready to Proceed

IOC management initially indicated the joint venture was intended solely for expediting development and TOT will farm-in the area. That premise had not changed when the companies announced the closing of the deal. Dr. Michael Hession, Chief Executive Officer of InterOil, said: “The key point is the money we get from Total today keeps us fully funded throughout the drilling program. That’s a major achievement for our company.”

PRL 15’s resource is vast and is the largest undeveloped gas field in PNG. Oil Search estimates the block holds roughly 5.3 gross Tcf with additional upside potential. An independent study by Gaffney Cline & Associates estimates 7.0 Tcf in P50 recoverable resources.

IOC said the wells in the region take an average of 90 days to complete and the drilling of three exploration wells are already underway. The company anticipates drilling up to eight total exploration and appraisal wells in the next 12 to 15 months. The Wahoo well, located to the southeast of PRL 15, has been spud and flow rates are expected to be received by early May. In a conference call on March 26, 2014, management said the Bobcat well has already been spud and intends to spud the Raptor well “within the next few days.” Results on both wells are expected about 90 days after spud.

Papua New Guinea Looks to Emerge in LNG Market

XOM’s previously discussed partnership with Oil Search is set to ramp up in 2014, and the PNG government specified four major partners in China and Japan are set to import its natural gas production.  According to the EIA, China was the world’s greatest overall energy consumer in 2012. Japan ranked fifth but was the largest importer of LNG and the third largest importer of oil. South Korea also stands to receive a tremendous amount of energy and demand is expected to surge 67% by 2027. An October 13, 2013 report by Asian Development Bank (ADB) forecasts Asian and Pacific nations will need an $11.7 trillion investment in energy development in order to meet demand by 2035. The EIA expects natural gas consumption in Asia to double by 2040.

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Important disclosures: The information provided herein is believed to be reliable; however, EnerCom, Inc. makes no representation or warranty as to its completeness or accuracy. EnerCom’s conclusions are based upon information gathered from sources deemed to be reliable. This note is not intended as an offer or solicitation for the purchase or sale of any security or financial instrument of any company mentioned in this note. This note was prepared for general circulation and does not provide investment recommendations specific to individual investors. All readers of the note must make their own investment decisions based upon their specific investment objectives and financial situation utilizing their own financial advisors as they deem necessary. Investors should consider a company’s entire financial and operational structure in making any investment decisions. Past performance of any company discussed in this note should not be taken as an indication or guarantee of future results. EnerCom is a multi-disciplined management consulting services firm that regularly intends to seek business, or currently may be undertaking business, with companies covered on Oil & Gas 360®, and thereby seeks to receive compensation from these companies for its services. In addition, EnerCom, or its principals or employees, may have an economic interest in any of these companies. As a result, readers of EnerCom’s Oil & Gas 360® should be aware that the firm may have a conflict of interest that could affect the objectivity of this note. EnerCom, or its principals or employees, may have an economic interest in any of the companies covered in this report or on Oil & Gas 360®. As a result, readers of EnerCom’s reports or Oil & Gas 360® should be aware that the firm may have a conflict of interest that could affect the objectivity of this report.