and on page 36 they state their portfolio study has led to 4 potential farmins.
Botten sounds keen to facilitate the development of 2C 10 TCF resources at P'nyang and Elk-Antelope into 2-3 more trains at PNGLNG.
Keeps alive HZN's option of linking into a pipeline from P'nyang.
Article from yesterdays AFR
Oil Search banks on "greed and avarice"
Egos come large at the super-major end of the oil business. And Oil Search's Peter Botten now finds himself a "facilitator and influencer" squeezed between oil emperors Exxon of Texas and Total of France.
Botten's task is to ensure his partners old and new come to firm and rapid agreement over alignment of Papua New Guinea's original liquid natural gas project, which is run by Exxon, and the big Gulf country gas discoveries that were supposed to feed a second project operated by Total.
Oil Search's chief executive says he is approaching his role helping to form a new consensus with utter confidence that Total has moved on from its original idea, that everyone involved in the consolidation negotiations due to begin in October will arrive with minds opened by necessities made evident by the oil price recession and that no one wants to repeat the errors made in the lead-up to the $60 billion Curtis Island experiment.
"In the end greed and avarice will reign," Mr Botten mused after being pressed on the substance of his confidence.
"That certainly holds," he told me later, "whether we like it or not. The oil industry itself has not got a great record in making really measured decisions. The recalibration of the oil and gas price has been good for the industry as a whole. It has got focus back on returns and making sensible decisions with the right risk profile.
"The industry had become profligate and somewhat lazy. It had built a cost base into core operations that was unsustainable. The last two years has bought us all back to reality," he said in closing a short but brutal appraisal of his industry.
Financial carnage
On the one hand, the timing of oil's arrival at its own new normal has been hurtful to Oil Search. The interim numbers Botten introduced on Tuesday certainly highlighted financial carnage caused by falling oil and gas prices (which fell 30 and 40 per cent respectively over the first half).
Production rose over the half mostly because PNG LNG consistently ran above its nameplate capacity of 6.9 million barrels of oil equivalent. Recent months have seen production run at a 7.7mboe run rate. Those efficiency tonnes contributed much to another step-down in unit production costs, which finished the half averaging $US6.34 a barrel of oil equivalent.
But an average oil price of $US41.61 a barrel translated into gas prices that pruned 32 per cent, cut more than 50 per cent from operating cash flows and left net profit before tax at a spare $25.6 million. A year ago, when the oil priced averaged $US56.64 through the half, Oil Search generated a profit of $US227.5 million and paid a dividend equivalent to US6¢ a share. This time around the board erred on the side of generosity by awarding the owners a US1¢ a share payout.
Those numbers illuminate how leveraged Oil Search and the bulk of its peers are to the upside in the oil price. The challenge at times like this is to explain that cyclical reality and to differentiate your business through its response to price recession.
That is why the investor briefing that followed the release of Oil Search's numbers was such a classic of the oil industry kind. After a perfunctory but frank discussion of the interim numbers, Botten turned his gaze to the future. And, to be frank, why wouldn't you given how recent events so forcefully illuminate the potential to double the size of the PNG LNG project while further reducing costs and embedding PNG as the lowest cost, highest margin operator in Asia's rich seaborne gas trade.
Shaping role
That brings us, neatly enough, back to the power of "greed and avarice" and the shaping role that Botten has in demonstrating the value of a co-operative development of the next generation of PNG gas giants.
To refresh here, Exxon is the senior owner and operator of the PNG LNG. It is probably the lowest cost LNG producer in our region and it is 29 per cent owned by Oil Search. Oil Search, in turn, discovered and operates the big gas fields that feed PNG LNG's two trains.
Total, on the other hand, is the nominal operator and 40 per cent shareholder of twinned gas discoveries that, until quite recently, looked set to feed PNG's second LNG project. Since 2014, Oil Search has been a 22.835 per cent owner of those gas fields, Elk and Antelope. That deal was mired in some controversy because it was essentially financed by a $1 billion capital injection by PNG and because Oil Search arrived in the ownership circle with the clear intent of driving the Elk-Antelope gas into PNG existing project.
The financial logics of an alliance of effort were given an impressive airing on Tuesday. Oil Search reckons that pumping Elk-Antelope gas to Asian customers through new trains at the exiting project would save up to $US3 billion in capital investment and generate $US125 million annually in operating expenses. It could also speed development of both Elk-Antelope and another Oil Search managed discovery called P'nyang.
Speed matters because it reduces the period through which the capital already sunk generates no income and, in this case, because it would put the new gas at the front of a queue to fill a gap between supply and demand that is expected to start yawning from 2022.
The original Total plan for PNG LNG had first gas arriving some time after 2021-22. On Tuesday, Oil Search offered a tentative timeline that would see integration agreements this year, project design and gas marketing begin almost immediately and a final investment decision in early 2018. Even more bullishly, Oil Search suggested early construction work could begin by the third quarter of calendar '17.
Competitive certainties
Two certainties underscore everything that Botten says on the potential of Total co-operation with Exxon.
First comes the certain knowledge that Elk-Antelope doesn't yet have the certificated resource to secure its investment case with a major. The ability to move fast only comes with the addition of the certificated resource Oil Search can add to the mix.
And second there is the certainty that brownfields development through PNG LNG will see Total deliver the new gas to market at a materially lower cost than a new greenfields project, a potential that is as attractive to all the partners including the PNG government.
"It would, no doubt, drive us further down the cost curve, absolutely it does. Lower capital costs and lower operating costs translate into a more competitive unit cost. Absolutely."
To give you an idea of what Botten is talking about, the biggest part of the existing project's cost base is its financing costs. All told, costs at PNG LNG run at about $US8.16boe. But break-even after sustaining capital and debt repayment is about $US27boe. Pruning the cost of a project by maybe 15 per cent and slicing better than $US100 million annually from its opex numbers guarantees lower costs and higher margins. And that locks in resilience through the bottom of the cycle and differentiating cash flow and profit out-performance when the cycle turns.
To demonstrate what that means in a competitive sense, consider that even before covering debt, Santos needs a price of $US40-45boe.
One other titbit Botten offered on Tuesday was the potential that, whatever pathway the Elk-Antelope partners take to development, the end result could be that their will be equity marketing of the LNG that is produced.
Presently Exxon markets PNG's gas. But the government has expressed an interest in marking its future share of Elk-Antelope production and Botten says he shares that interest.
"Part of the strategic review that we will run over the next eight weeks will be to develop an understanding of how we play in the new market, to understand whether we should be developing some form of trading capacity to manage ebb and flow of market. But it should be said that it is a real trend, that everyone of the majors is moving into that business and is building itself a trading arm."
Read more: http://www.copyright link/opinion/columnists/oil-search-banks-on-greed-and-avarice-20160823-gqza47#ixzz4IIjocg5K
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