The battle for InterOil: what’s in it for Papua New Guinea?


Next week, the Papua New Guinea-focused gas explorer InterOil may well have a new owner, after its shareholders consider rival offers from Oil Search and ExxonMobil. Business Advantage PNG considers the implications for PNG’s second gas project, Papua LNG and the wider economy.


InterOil’s Antelope 2 well. Credit: InterOil

An initial US$2.2 billion bid from Oil Search in June prompted a counter offer this week from Oil Search’s venture partner in the existing PNG LNG gas project, operator ExxonMobil. The offer is estimated to be worth US$2.5 billion.

Confirming the ExxonMobil bid, InterOil described it as ‘superior’ to the Oil Search offer.

InterOil’s major asset is its 36.5% stake in the Papua LNG project, based on the Elk and Antelope gas fields in PNG’s Gulf Province.

Cash flows

The prospect of an Oil Search takeover bid has possibly been in the making for two years, after Managing Director, Peter Botten, told Business Advantage PNG in May, 2014, the company ‘will have a very strong legacy cashflow that emanates from the sale of LNG’.

‘That cashflow, which is likely to be in excess of US$1.5 billion per year, underwrites an ability to continue LNG growth and growth in our oil business, primarily in Papua New Guinea,’ he said.

                                        Papua LNG project interests

If Oil Search buys InterOil                   If ExxonMobil buys InterOil

Story continues after advertisment...

Oil Search 37.4%                                           Total SA                40.2%

Total SA           62.1%                                     ExxonMobil         36.5%

Minority      o.5%                                           Oil Search             22.8%

                                                                  Source – Oil Search, Financial Review

If Oil Search acquires the company, then the French major Total SA, currently the designated operator of the Elk-Antelope project, will remain in a strong equity position for the Papua LNG project, as Oil Search has agreed to sell down 60 per cent of InterOil’s interests in the project to Total in order to fund the deal.

However, if ExxonMobil buys the company, Total will be in a weaker equity position. Should the PNG State acquire its maximum entitlement of 22.5 per cent of the project, Total’s equity—and, potentially, degree of control over the project—might be diluted further.

Control of the Papua LNG project will be crucial, given both ExxonMobil and Oil Search are likely to want to integrate the new project as close as possible into the existing PNG LNG project, whereas Total may prefer more autonomy over how the new project is developed. (Although, under an MOU, Oil Search and Total have already agreed to ‘pursue cooperation and/or integration opportunities between the Papua LNG Project and the PNG LNG Project, to maximise value for all stakeholders’.)

Oil Search

Oil Search's Peter Botten. Credit: Oil Search

Oil Search’s Peter Botten. Credit: Oil Search

Oil Search, in which the PNG Government has a 10 per cent shareholding, would appear to be a likely winner either way. It owns a stake in both the PNG LNG and the prospective Papua projects.

The company is bidding for InterOil in the hope of linking the two LNG projects together to help cut costs and speed up development of the Papua LNG project, and improve profitability of the existing PNG LNG project.

This week, Oil Search CEO Peter Botten released an independent report concluding that gas from the Elk-Antelope fields could underpin ‘at least two additional LNG trains’.

In 2014, Botten laid out his argument for a co-operative approach to developing new gas projects, at the 2014 Papua New Guinea Advantage Investment & Infrastructure Summit in Port Moresby. He has estimated savings of US$3 billion through co-operation.

Oil Search’s bid for InterOil has the support of French major, Total SA. Total has a 40 per cent shareholding in Papua LNG, which will rise to 62.1 per cent if Oil Search’s bid is accepted.

Right time, right place

ExxonMobil's Andrew Barry

ExxonMobil PNG’s Andrew Barry

The bidding war has occurred despite gas prices being 38 per cent lower than five years ago. It underscores PNG’s place as a key LNG producer, especially in the burgeoning Asian region, according to Andrew Barry, Managing Director of ExxonMobil PNG.

‘Through 2025, global LNG demand is projected to rise at twice the rate of natural gas,’ he told the Australia Papua New Guinea Business Forum in Cairns in May.

Barry indicated that it is demand in Asia that is focusing the mind of oil producers:

‘LNG will be essential to meet the world’s growing need for natural gas, particularly in the fast-growing economies of Asia Pacific, where LNG demand will grow by over 60 per cent over the next decade, accounting for about two-thirds of the total global demand increase.’

One of PNG’s advantages is its close proximity to North Asia. This is of significance both in terms of the cost of transport and the security of supply. Unlike gas suppliers from the Middle East, ships from PNG do not have to go through the potentially dangerous Strait of Malacca.

National interest

The Institute of National Affairs' Paul Barker

The Institute of National Affairs’ Paul Barker

With government finances under stress and PNG’s economy currently in a slowdown, the early development of the Papua LNG project would be welcomed by both business and government, although the direct revenues from the project would be years away.

The PNG LNG project has already showed us how the economy can be boosted, even transformed, by a major project—although it has not been without growing pains.

Buying InterOil would also cement ExxonMobil’s dominant position in the PNG gas industry.

The Director of the Institute of National Affairs, Paul Barker, sees this as a mixed blessing. While he tells Business Advantage PNG there is ‘some capacity to rationalise operations and economise on some costs,’ he also notes there would certainly seem to be ‘some advantages’ for PNG in having more than one major LNG operator.

Global coverage

All this talk of bid and counter bid has once again put PNG on the map—and this time for positive reasons. The bids have attracted attention of the major media outlets across the globe. The Wall St Journal points out that if ExxonMobil does buy InterOil, it will be its first acquisition in years, while the Financial Times reports that Exxon’s Chief Executive ‘has argued that oil and gas companies have been generally overvalued, making acquisitions unattractive’.

The offers

ExxonMobil has offered US$45 worth of its own shares for each InterOil share plus a payment of US$7.07 per share for each trillion cubic feet equivalent (tcfe) for resources of more than 6.2 tcfe at the Elk-Antelope gas field, up to a maximum of 10 tcfe.

Oil Search has offered of US$8.05 of its own shares for every InterOil share, plus US$0.77 per million cubic feet cfe for resources of more than 6.2 tcfe at Elk-Antelope.

Reuters put the value of the Oil Search bid at US$2.2billion.

Bloomberg values the Exxon offer at $2.5 billion, a ten per cent premium.

The bid pits ExxonMobil, the world’s biggest oil company, against French major Total SA, which is backing Oil Search.

The InterOil Board of Directors continues to recommend the Oil Search transaction to its shareholders, the company said in a statement.




Leave a Reply