Papua New Guinea’s much-anticipated second gas project could turn out to be an extension of its first, as ExxonMobil commences exclusive negotiations with InterOil and Pacific LNG.

Gas flare at InterOil’s Antelope gas field in Gulf Province. Credit: InterOil

InterOil and its joint venture partner Pacific LNG have confirmed they are entering into exclusive negotiations with ExxonMobil, the operator of US$19 billion PNG LNG project, to develop InterOil’s Elk and Antelope gas fields in Papua New Guinea’s Gulf Province.

‘The transaction has been discussed with the Government of PNG and any future agreement will be subject to their final approval,’ the Houston-based InterOil said in a statement.

The announcement marks the culmination of quest by InterOil to find a major development partner for what has long been seen as potentially PNG’s second liquefied natural gas project.

Any deal is likely to involve granting ExxonMobil sufficient interest in the Elk and Antelope to obtain enough gas for an additional gas processing unit, or ‘train’, at its present LNG gas processing plant, rather than build a new one, according to industry analysts.

‘They could save four-to-five billion dollars by not building a standalone plant’

ExxonMobil’s US$19 billion PNG LNG plant, due for completion in 2014, is currently set to use two such ‘trains’.

Reserves need proving

While the size of the gas reserves at Elk and Antelope are not proven as yet, InterOil’s now-retired Chief Executive Officer Phil Mulacek last year told Business Advantage PNG that reserves could be as large as 10 trillion cubic feet, giving a potential annual export capacity of 8.8 million tonnes of LNG over 15 years.

Industry analysts say if the project is between four and five trillion cubic feet of natural gas, ExxonMobil is likely to prefer to expand its existing plant rather than build a new one.

‘They could save four-to-five billion dollars by not building a standalone plant,’ says David Lennox, senior analyst with Fat Prophets in Sydney, Australia.

Audio link

Listen to Business Advantage’s Andrew Wilkins talking to Radio Australia about the negotiations here.

‘If you look at where the Elk-Antelope LNG field is along the southern coastline [of Papua New Guinea], it’s within spitting distance of the PNG LNG construction site,’ he added.

John Hirjee, Managing Director and Senior Analyst with Deutsche Bank in Melbourne agrees.

‘It’s early days, but a key feature of the InterOil project is how large the gas field is. If InterOil can confirm how much gas is there, that will determine if it could be a standalone plant.

‘I’ve seen various media reports saying the amount is four-to-five trillion cubic feet. My inclination is that this is not large enough for a standalone project.’

While ExxonMobil has followed normal policy in not issuing an official statement about the negotiations, ExxonMobil’s Vice-President for the Middle East and Australia, Mark Nolan, has been quoted as telling media that four-to-five trillion cubic feet (TCF) of natural gas is required for a new train.

How long before we know?

Fat Prophets’ David Lennox

Both Hirjee and Lennox expect the talks to be resolved by year’s end.

‘They will want to tie up their customers into long-term contracts before the US shale gas gets into the market,’ says Lennox.

Last month, the Obama administration in the United States ended a two-year freeze on LNG export applications, approving exports from Freeport LNG’s Quintana Island, Texas, amid petroleum industry  calls for the US Energy Department to approve a backlog of applications.

Lennox describes the partnering of ExxonMobil with InterOil as ‘comfortable’ for the PNG Government, given its long association with other projects.

While the negotiations offer InterOil and Pacific LNG a way of commercialising their gas reserves, the negotiations may still leave room for them to develop their own LNG project in Gulf Province with gas not sold to ExxonMobil.