Oil Search (OSH) has decided to throw its lot in with LNG.
After a briefing in Sydney yesterday it’s clear the LNG project will be a company changing investment for OSH, which owns 30%.
A review of the company’s outlook for the next five years has come down heavily in favour of restructuring its asset base to raise cash and to concentrate on the multi-billion dollar LNG project in Papua New Guinea.
Oil Search says it will sell assets in the Middle East, and perhaps try to increase its stake in the PNG project, should AGL Energy sell its interest.
All up it expects to have to find around $US1.3 billion in equity and $US2.9 billion in debt to help fund its 30% share of the development of the project, which has an estimated cost of more than $US13 billion (and $US9.9 billion in debt). That’s around $A4.7 billion in total for OSH.
Oil Search says that despite the global credit crunch, it thinks there’s sufficient funding capacity from the likes of sovereign wealth funds to meet the project’s total debt requirement of around $US9.9 billion.
The project is by no means assured: several hurdles remain to be surmounted but the partners are moving further towards a green light for the project which is lead by the giant Exxon Mobil group of the US.
The partners last week revealed a commercial agreement on sharing of the huge development costs. Other partners in the project are Santos, AGL Energy, Nippon Oil and the PNG landowners.
The project now needs a gas agreement with the PNG government to clear the way for a final decision to go ahead with engineering and development for the project, possibly by next month.
The proposed project will have a production capacity of 6.3 million tonnes a year. The venture partners want first deliveries starting by 2014.
AGL Energy is considered a seller as it looks to offload marginal assets to raise funds for the possible privatisation of NSW electricity assets. It will have difficulty buying any of the retail assets, especially in Sydney, Newcastle and Wollongong because it is the state’s major gas supplier.
The privatisation might not happen, but AGL is considered a seller of PNG because of the capital stretch required to fund its share (the company is struggling with poor market credibility at the moment). It has committed itself to selling hundreds of millions of dollars of assets to lower its debt and improve its credit rating.
OSH says that if AGL sells, it would be interested in buying as it has a pre-emptive right over the stake.
Given the international credit crunch, the funding of such a huge project remains the big question for investors.
The presence of Exxon as lead partner will make it easier to attract interest from sovereign wealth funds for other parties, such as OSH.
OSH claimed yesterday that interest from banks signal there is "more than sufficient capacity” to meet the debt funding.
Societe Generale is advising the venture on financing the project, which will be funded about 70% by debt and the rest by equity.
Oil Search shares rose 8c to $4.73, after hitting a high of $4.90 yesterday while Santos (which is looking at a smaller LNG project in Queensland based on Coal Seam Methane gas) rose 64c to $13.55.
Oil Search CEO, Peter Botten told a briefing yesterday that the company, which is PNG’s biggest oil producer, plans to sell interests in the Middle East and North Africa as well as some in Papua New Guinea to finance the equity part of its commitment.
The sales will probably include exploration and production interests in Yemen and Egypt, exploration acreage in Tunisia and possibly exploration interests in Libya, while it will keep interests in Yemen, Tunisia and possibly Libya, and is considering assets in Kurdistan.
Mr Botten said that Japanese buyers are interested in the LNG from the project and are also interested in taking an interest. Nippon Oil is the sole Japanese shareholder at the moment.
Mr Botten said the company plans to maintain oil output at around 40,000-50,000 barrels a day until 2011 to help generate cash for the project.
