Weekly Commentaries

This is Sunday Chronicle's weekly commentaries on various issues of interest affecting the country. All individual commentators are done by elite Papua New Guineans from diverse educational backgrounds.

Monday, February 22, 2010

InterOil's oil optimism 'hits dry bottom'


IT IS  now apparent that InterOil's highly fancied Antelope2 well has hit a dry bottom apart from the gas and condensate columns at 637 meters of hydrocarbon column height.

After the drill encountered world-record cash flow rate and followed by condensate, announcements to the market raised expectations for a large oil field at the bottom, but that was never to be. High expectations were raised, so much so that Petromin's CEO Joshua Kalinoe proclaimed in a media statement that a confirmation of oil in the drilling program will totally change the economics of the project. Petromin is the junior partner in InterOil's proposed LNG project.

Despite the disappointing result, Phil Mulacek, the CEO of InterOil is still very pleased with the results "which will be the main inputs into updating their resource estimates and which we expect will help progress our negotiations with potential condensate stripping and LNG partners."

An independent evaluation team from New York , GLJ Petroleum Consultants, last Wednesday announced that InterOil could be sitting on more than 8 trillion cubic feet of contingent recoverable gas sources at its Elk/Antelope field in the Upper Purari area of the Gulf Province.

Recoverable condensate - a mixture of oil and gas - is estimated at 156.5 million barrels as at December 31, 2009. This represents a 141% increase from its 2008 reserves. And this is not the end of the story, as InterOil had just purchased one more exploration rig from Parker Drilling to drill about 20 other areas within its exploration licence, so we can expect more announcements in the months ahead.

While it assembles its new rig for more drilling, it is running further tests on commerciality of oil shows it encountered in Antelope2. With the new drilling technology at hand, it will conduct horizontal drilling at sections it encountered oil The horizontal drilling and evaluation is expected to be completed by mid-March.

The market is keeping a close watch on the horizontal drilling program. The company says it will provide a full technical update of all the well testing results and analysis at that time.

The volumes of natural gas and condensate estimated in the Elk/Antelope structure continue to form the basis of discussions with potential industry and investment partners, according to Mr Mulacek.

The Gulf Provincial Government and InterOil are surging ahead with plans to build a stripping plant in the province to process the condensate for petro-chemical products which Mitsui Petrochemical Corporation  of Japan is interested in. The oil from the stripping plant will of-course be shipped to the company's Napanapa refinery for further stripping into diesel fuel, petrol, aviation gasoline and kerosene.

Contingent resources referred to above are those quantities of natural gas and condensate estimated, as of a given date, to be potentially recoverable from known accumulations using established technology or technology under development, but which are not currently considered to be commercially recoverable due to one or more contingencies.

The economic status of the resources is undetermined and there is no certainty that it will be commercially viable to produce any portion of the resources. The following contingencies must be met before the resources can be classified as reserves:
  • Sanctioning of the facilities required to process and transport marketable natural gas to market.
  • Confirmation of a market for the marketable natural gas and condensate.
  • Determination of economic viability.

Although a final project has not yet been sanctioned, pre - Front End Engineering and Design (FEED) studies are ongoing for liquid natural gas (LNG) and condensate stripping operations as options for monetization of the gas and condensate.

What the company and the Gulf provincial government are doing now are part of the process of meeting these conditions.

Internal Security
While InterOil, ExxonMobil and other players like Oil search Ltd and Talisman Energy and  mean well in their investments, there are serious security concerns which the state must address ASAP.

With the shooting death of an Oil Search Ltd staff in the Hides Gas project, attacks on ExxonMobil's contract staff at project sites and suspension of all the ground works by ExxonMobil in Southern Highlands, industry leaders are calling for government's immediate intervention.

An American consultancy group last Wednesday ranked PNG as one of the worst places for investors.
One petroleum industry executive told me: "How long can investors put up with attacks on staff by locals ... can the government do something quickly."

An one from the sector said the mining companies attracted quite a bit of flak from locals and politicians and perhaps there needed to be some understanding reached between the investors and government departments who were monitoring and regulating their operations.

Governor of New Ireland Sir Julius Chan wants Allied Gold out of Simberi gold mine in his province. Last month he fired a broadside at the Department of Environment and Conservation and the Mineral Resources Authority for negligence by not being vigilant in their duties until the mines inspector discovered serious health and safety issues and ordered the mine shut until the problems were rectified.

In the US, PNG was ranked poorly as a place to invest in by mining and petroleum resource developers whereas Australia, just south of PNG was given the thumbs up. The ranking was made by New York-based mining consultancy firm, Beare Dolbear (BD), whose views are respected by investors and market analysts.

Beare Dolbear's "2010 Where NOT to Invest" report ranked PNG in 21st place out of 25 major mining countries.

A report by ABC's Pacific Beat program said BD ranked PNG in the bottom group of countries according to the way it handled social issues such as poverty, in the second bottom group on mine permitting delays, and near the bottom on corruption.

Beare Dolbear Chief Executive Officer Reinis Sipols said the insecurity of land tenure was also a problem. "If your tenure, or your licenses, or your land positions can't be secured and can't be defended in court, it puts in doubt the entire concept of why would you invest there, why would you go there."

Such perceptions drive a negative image on PNG as an investment destination. Among the first issues in a boardroom discussion is country risk and security before investors can put down their money. If the board members feel it's unsafe, they will take their money elsewhere regardless of the reality on the ground.

PNG cannot be complacent on the fact that we are strategically located to supply our high quality resources to the world's biggest markets in Asia. That can very quickly fade into insignificance if we do not arrest the security issues as a matter of priority.

The government has yet to announce any long-term policy initiatives regarding security of the multi-billion Kina projects in the Central, Gulf and Southern Highlands and Hela provinces.

Security needs to be beefed up. If it means mass recruitment of police personnel, so be it. The government needs throw in money and play its role in safeguarding the very projects that will pay billions of Kina in taxes and benefits to the government. The Internal Security Minister needs to live up to his title!

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