InterOil Corporation (ticker: IOC) is developing a vertically integrated energy business whose primary focus is Papua New Guinea. 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.
On December 5, 2013, InterOil announced the sale of 61.3% gross interest in Petroleum Retention License 15 (PRL15), which includes the Elk-Antelope gas fields, to Total SA (ticker: TOT). As part of the agreement, TOT receives exclusive negotiating rights to farm-in all of IOC’s exploration licenses in Papua New Guinea. The transaction price is pending the appraisal and certification of Elk-Antelope, with payments expected to be between $1.5 billion to $3.6 billion in regards to a range of 5.4 Tcfe to 9.0 Tcfe.
InterOil receives a fixed payment of $613 million for the transaction completion, $112 million for a new LNG plant and $100 million for the first LNG cargo from the proposed plant. Variable payments for amounts greater than 3.5 Tcfe will depend on results from independent appraisals. Certification is expected to be completed in 2015 and TOT will cover both the appraisal costs and LNG project. Total also has an option to take an interest in InterOil’s three additional exploration leases in Papua New Guinea.
In a conference call on December 6, 2013, Michael Hession, Chief Executive Officer of IOC, said the company’s main goal of the process was to begin development. The idea of implementing a thick rig in the region is being discussed by the Board of Directors in an effort to raise the rig count. Management reminded investors the cash return on the property is dependent on the future extraction of resources as part of the joint venture, rather than an overall lump sum payment by Total.
IOC Finds Partner after Lengthy Bidding War
InterOil’s lengthy partnership negotiations included discussions with ExxonMobil (ticker: XOM) dating back to May 2013. However, the companies failed to reach an agreement. Shell (ticker: RDS-B) joined talks in June 2013 and was previously believed to be in a head-to-head battle with XOM. TOT’s presence in negotiations was generally unknown by the public, as neither the French-based company nor IOC revealed the collaboration. Total first entered the region in October 2012 after purchasing a 40% stake in PPL 234 and PPL 244 from Oil Search Ltd. (ticker: OSH.AX). The company holds an option for 35% ownership in the PPL 338 and PPL 339 permits, which are nearby the Elk-Antelope fields.
Despite not reaching a deal with InterOil, XOM still has a $19 billion project in the PNG region that is expected to commence in 2014. Forecasted production capacity is 6.9 million tons per year.
Asia Energy Market a Hot Commodity
The extreme disparity in LNG pricing, as seen by the map on the left by the Federal Energy Regulatory Commission, can be attributed to the U.S. shale boom and the growing
need for energy in Asia. According to the EIA, China was the world’s greatest overall energy consumer in 2012 and Japan ranked fifth. 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.
Asia’s energy landscape is rapidly changing due to environmental factors. Its heavy reliance on coal is creating major environmental pollution. Disasters and corruption in various nuclear plants have prompted countries like Japan and South Korea to decommission plants and consider options for a safer, more environmentally-friendly option like LNG. Japan, possibly hit hardest by the nuclear backlash, was the world’s top importer of natural gas in 2012.
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