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Total keeps PNG prize after Oil Search loses court battle

Oil Search lost a court battle with InterOil, writing a another chapter in the debate over Papua New Guinea's gas scheme

Oil Search's effort to oust French major Total from the potentially prolific Elk-Antelope gas scheme in Papua New Guinea (PNG) has failed after the Australian company lost a legal wrangle with US joint venture partner InterOil.

A London arbitration court ruled that Oil Search had no pre-emptive rights over InterOil's sale of a stake in the PRL 15 permit, which holds one of Asia's largest undeveloped gas fields, to Total, in a deal worth more than $400 million.

Following the decision, the PRL 15 joint venture will continue to comprise Total (40%), InterOil (37%) and Oil Search (23%), but their interests will shrink when the PNG government eventually takes up its right to a 22.5% stake.

The decision makes it more likely that the Elk-Antelope gas resource - estimated to hold anywhere between 3 trillion and 12 trillion cubic feet (cf) of gas - will be developed through a liquefied natural gas (LNG) project separate to ExxonMobil's PNG LNG, which started up last year and is seeking gas for an expansion.

Had Oil Search, which is also a partner in the PNG LNG scheme, won the arbitration, it would have improved the chances of Elk-Antelope being developed as an expansion of ExxonMobil's project, rather than a stand-alone plant operated by Total.

Oil Search said that its loss in the legal tussle would not trigger any delay in work to appraise the resource through further drilling, and move it toward development.

Peter Botten, managing director of Oil Search, has previously said the resource could be developed about two years earlier through an expansion of PNG LNG, the country's maiden LNG export plant, and potentially save some $3 billion in costs. 

But analysts believe Elk-Antelope LNG will be a competitive global LNG project, making its development highly likely once reserves are established. If appraisal goes according to plan, then a 6.8m tonne per year two-train LNG development could be sanctioned by 2017 with first production in 2021. 

Any proposed Elk-Antelope LNG development could still share PNG LNG's export infrastructure already in place at the brownfield site in Port Moresby, making the development particularly attractive. 

Given the government's involvement in both developments many expect it will force the ventures to work together to capture synergies where possible. 

Analysis from Wall Street research firm Bernstein shows there could be at least $3 billion in savings relative to the $19bn PNG LNG project, which started up last year. At $16bn, or around $2000/tonne, Elk-Antelope would be one of the lowest-cost projects in the region. With a breakeven price delivered to Tokyo of $9 per million British thermal units the ExxonMobil-led liquefaction scheme is already one of the most competitive globally.

InterOil's deal with Total saw the US listed company net $401m in March last year while locking in a further $138.7m of milestone payments. The upside includes a wealthy schedule of bonus payments if appraisal proves more gas than the opening deal numbers reflect. Additional payments start kicking in at the certification of 3.5 trillion cf of gas, pretty much the minimum that InterOil and Total know is already there.  If appraisal drilling bolsters the resource to 7.1 trillion cf, there should be ample gas for at least two LNG trains, making InterOil's deal worth $1.62bn - more than half the company's market capital. 

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