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Oil Search flags boost to PNG gas reserves

Oil Search has lifted the lid on a likely significant increase in its gas resources, fuelling optimism about the case for expanding its LNG position in Papua New Guinea despite delays in talks on the project.

The Papua New Guinea-focused player said early indications from an independent assessment of fields that supply the PNG LNG project was likely to result in higher reserves figures, to be revealed in February's annual reserves report.

Gas was also found in December at the Muruk-1 well, while the undeveloped P'nyang and Elk-Antelope fields add to the basket of resources available to feed an expansion.

Managing director Peter Botten said the resources support Oil Search's view that there is more than enough gas discovered in PNG to supply "at least two, and possible three, expansion trains" of LNG production in addition to the two units at the PNG LNG venture.

The news came in what analysts described as a "strong" production report for the December quarter, which allowed Oil Search to beat its guidance for output in calendar 2016. Botten also signalled success in reducing production costs, while guidance for 2017 production was also marginally upgraded.

Work towards a keely awaited expansion of LNG capacity in PNG has been delayed by the stalling of ExxonMobil's takeover bid for InterOil, the original operator of the Elk-Antelope gas venture, due to a Canadian court ruling.

But the US major has since make a revised offer for InterOil, with shareholders to vote on the sweetened bid on February 14. The takeover will bring ExxonMobil into the Elk-Antelope venture, opening up scope for a more cost-effective expansion of LNG production.

Botten said that once the deal completed, talks on cooperation and integration of the next phase of LNG development would "commence, on an accelerated basis, in early 2017".

Bernstein Research, which is bullish on Oil Search stock, said the outlook for expansion in PNG "has never looked better".

"Oil Search has the most attractive growth portfolio of any E&P [exploration and Production Company] within the Asia-Pacific region as confirmed by this operating update," analyst Neil Beveridge said.

Beveridge said reserves upgrades at PNG LNG would support the expansion of its two production trains, while the Muruk find means a third train at the venture "is a reality". The Elk-Antelope gas would support a further two trains.

Still, others are less confident of an expansion given the oversupplied global LNG market, which may make it difficult for the PNG partners to Lock in customers.

Shares in Oil Search slipped 2¢ to $6.99.

Production in the December quarter reached​7.72 million barrels of oil equivalent, near a record and higher than analysts' expectations. The driver was a bumper performance by the PNG LNG venture, which is now producing at 20 per cent higher than its rated capacity.

Fourth-quarter sales were $US345.6 million, 12 per cent higher than the September quarter as stronger oil prices fed through to LNG prices.

But overall lower commodity prices compared to 2015 meant full-year revenues still slid 22 per cent to $US1.236 billion despite production edging up 3 per cent to 30.24 million boe, just above guidance.

Production this year looks set to be roughly flat or slightly lower, with Oil Search giving a range of 28.5 million-30.5 million boe.

Oil Search also announced it had exited its exploration venture in Kurdistan, and noted that it would close the sale of an exploration venture in Yemen early this year, completing its exit from the Middle East.

SOURCE: FINANCIAL REVIEW
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