Oil Search weighs plans for further LNG expansion via possible Exxon, Total deal

By Perry Williams on 2/17/2017

SYDNEY, Australia (Bloomberg) -- On the jungle-covered hills of southern Papua New Guinea, 62-year-old geologist Peter Botten is seeking to engineer a $5-billion deal that would cement the country’s emerging status as one of the world’s most lucrative gas exporters.

As managing director of Oil Search Ltd., the British-born petroleum industry veteran is trying to forge an agreement between two of the world’s biggest oil companies, Exxon Mobil Corp. and Total SA, as they weigh plans for further expansion of LNG projects in the southwestern Pacific nation.

At stake is the opportunity to tap PNG’s ample gas reserves more efficiently and meet a demand shortfall early in the next decade, avoiding the cost blow-outs that have delayed or scuppered new gas-export projects globally amid a prolonged market slump.

“The reality in this cycle is that most company boards around the world would be reasonably challenged to sanction multi-billion-dollar major projects,” Botten said in an interview from his Sydney office. “But sooner or later that has to happen. And the key customers you see in Asia know they have to support good quality projects to avoid high prices in the next decade.”

Botten has spent the past 25 years working with scientists, villagers, power companies, and government officials to transform one of Asia’s poorest countries into an LNG heavyweight. The country’s first LNG complex -- the $19 billion PNG LNG -- briefly made the sparsely populated nation among the world’s fastest-growing economies after it started shipping gas in 2014.

Exxon minnow

Oil Search, established in PNG since 1929 and the company Botten has led for 23 years, is a 50th the size of Exxon, yet Botten’s role is seen as catalytic in getting such a deal over the line.

Despite his family being based in Perth, Western Australia, Botten lives almost full-time 2,500 mi away in Port Moresby. Understanding the politics of landowner groups who live alongside PNG LNG’s vast 400-km gas pipeline is virtually impossible from the company’s Sydney office, he contends.

His presence in the national capital has also helped galvanize ties with Prime Minister Peter O’Neill, with whom Botten says he speaks every few days. That, along with Oil Search’s shareholdings in rival ventures, puts him in a strong negotiating position amid a complex web of corporate maneuvering.

“These strong relationships and the long history of Oil Search in PNG no doubt enhance the prospects of getting such a deal over the line,” said Anthony Latimer, a Sydney-based lawyer with Norton Rose Fulbright. Latimer, who was raised in PNG, said Botten is well known to senior members of the government, including O’Neill.

Interoil takeover

Oil Search is a partner with Exxon in PNG LNG and also with Total and InterOil in Papua LNG, the country’s next major gas venture. Exxon is also strengthening its hand as it prepares to join the Total-run group via its impending takeover of InterOil, which discovered the vast Elk-Antelope gas field northwest of Port Moresby. 

Botten is pushing the idea that integrating both projects could save money and increase returns. For Oil Search, the savings could total $2 billion to $3 billion should the two ventures reach an agreement.

Oil Search closed down 0.8% at A$7.05 on the Australian Stock Exchange Thursday, extending to 1.7% the stock’s decline this year.

Exxon appears on board. It favors processing the gas from Elk-Antelope and loading it onto ships at the existing PNG LNG complex, according to a July 21 statement about the InterOil deal on its website. 

Total also remains open to cooperation, the company said in a Dec. 6 interview, citing the potential economic synergies from such a deal. O’Neill has also voiced support for cooperation between the ventures. Collaboration between the developments could result in savings of $5 billion, according to Perth-based consultancy RISC. Exxon declined to provide fresh comment, and Total and the PNG government didn’t respond to requests for comment.

Cost blow-outs

Both Botten and O’Neill want to avoid the mistakes made in the Australian LNG industry, where a lack of cooperation between operators led to billions of dollars of cost blow-outs hitting profitability. For Oil Search, it could mean a further boost to earnings, while spurring the tax revenue PNG earns from LNG.

Cooperation between the rival projects will save billions of dollars, according to Wood Mackenzie analyst Saul Kavonic, by avoiding the need to build costly new infrastructure.

Profit miss

While Wood Mackenzie ranks PNG LNG among the lowest cost -- and most profitable -- natural gas ventures for export globally, receiving commitments to fund a major expansion remains difficult. The operator of PNG LNG, Exxon, reported its biggest profit miss in at least a decade last month in a sign oil explorers remain stuck in a prolonged market slump.

Oil Search anticipates a possible investment decision in the second half of 2018 from the venture partners.

“The question is all about timing, and all of us -- Exxon, Total, the government and our other partners -- are committed to doing this in the most time- and cost-effective way,” Botten said.

After an investor tour of PNG in November, analysts are more circumspect. RBC Capital Markets Ben Wilson said agreement on a commercial deal has likely been put on hold, citing delays in the InterOil deal and a general election in PNG slated for mid-year.

Kavonic is also not optimistic. “LNG infrastructure sharing discussions are notoriously complicated and difficult,” he said. “They can take years and projects around the world haven’t happened because you can’t get alignment.”

Over supply

Botten says his task in aligning the different partners won’t be easy given the LNG market is drowning in supply. He expects demand, driven by Asian buyers, to tip the balance back in the favor of suppliers by mid next decade, making project sanctions in the next few years imperative.

Global annual LNG consumption may increase to 422 million tons by 2030, almost two-thirds more than last year, according to Bloomberg New Energy Finance. Exxon has forecast worldwide gas demand will expand at more than twice the pace of crude oil through 2040.

For Botten, the talks are also shaping into as a defining personal milestone. After boosting Oil Search from an explorer with a market value of just A$300 million ($230 million) to an LNG producer worth almost A$11 billion, Botten has signaled he will likely step down once the project gets the green light.

“The time to move on is when you see the next phase is going to happen,” he said. “There are questions around how you reinvest and how you move forward. That’s a five-to-seven-year cycle, which clearly I’m not going to be around for.”

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