Exxon forces consolidation on Papua New Guinea’s LNG
The US firm’s deal for a stake in a second gas-export project looks like a defeat for rival operator Total. But the synergies make sense
Total looks to have relinquished a stake in its planned Papua LNG project to ExxonMobil after the US major successfully trumped an earlier takeover bid for InterOil by Oil Search, the French group's two partners in its planned Papua New Guinea gas project. It follows a similar A$11.6bn ($8.9bn) bid for Oil Search by Australia's Woodside Petroleum last year.
At first sight, the tussle for Canadian-registered mid-cap InterOil appears counterintuitive in a region awash with liquefied natural gas. But the opportunity to extract significant, high-quality gas at low cost is what is driving the bids. Of prime appeal is InterOil's 36.5% interest in PNG's offshore tenement PRL 15, which includes the Elk-Antelope discovery, one of the largest undeveloped gas resources in Papua New Guinea, which InterOil describes as having "material exploration upside".
PRL 15 holds enough gas reserves for at least one large LNG train: the Elk-Antelope fields alone have been assessed to hold 6.5 trillion cubic feet of 2C certified gas reserves. Total is operator of Elk-Antelope with a 31.1% interest, alongside InterOil (28.3%) and Oil Search (17.7%). Gas from the resource is expected to feed Total's planned Papua LNG project, although a final decision has not been made.
Assuming construction starts around 2018-19 output from Papua LNG could hit the market early next decade, just as demand in northern and southeast Asia starts to pick up, firming prices.
Total had hoped to increase its share of Papua LNG to a majority stake through its backseat role in Oil Search's friendly A$3bn share-and-cash offer for InterOil in May. This would have given Total 60% of PRL 15 and 62% of InterOil's other exploration assets in PNG.
InterOil's management happily recommended the Oil Search-Total deal to shareholders and it looked certain to proceed until Exxon emerged with a higher, unsolicited counteroffer in June. This was enough to persuade InterOil shareholders to switch allegiance. Oil Search and Total say they will not put forward another joint or separate counterbids.
On the surface, Total seems to have lost out from the deal while Exxon has doubled up on its LNG investment in PNG. But this belies the synergies and cost savings that can be gained from having a common shareholder in the two projects.
For Total, the entry of Exxon as a shareholder in Papua LNG will boost the project, streamline access to capital and let spending be shared, while also building on Exxon's experience of building an LNG facility in PNG. Exxon has political clout in Papua New Guinea after ensuring PNG LNG came on stream and brought tangible economic benefits to the country.
Exxon's buy-in into Papua LNG should also ensure that infrastructure common to the two projects is shared rather than duplicated. Such duplication in Queensland led to unnecessary expenditure.
The Elk-Antelope fields are geographically closer to PNG LNG's processing plants and provide the opportunity to use the same pipelines, increasing margins. While the two projects are still likely to be developed separately, consolidating the infrastructure and capital equipment is in line with industry belt tightening.
Earlier this year, Oil Search's chief executive Peter Botten said cooperation between Papua LNG and PNG LNG would "deliver substantial further value and be very, very competitive in what is a challenging LNG market over the next three to five years".
"Sooner or later, the supply-demand cycle will change for LNG," he told ABC. "The demand side is attenuated a little bit by world economic factors, but … very few LNG projects are going to be sanctioned over the next five or so years. And we believe that Papua LNG, an expansion of PNG LNG, can be hugely competitive."
For Exxon, a stake in Papua LNG also gives it access to low cost gas with which to expand its $19bn, 6.9m-t/y PNG LNG operations, where up to five export trains are on the drawing board. Exxon has been exploring for feed-in gas elsewhere in PNG but has been largely unsuccessful. Being able to tap into Elk-Antelope makes logistical sense and will guarantee enough gas supply for both projects