MATT CHAMBERS | The Australian | March 01, 2014 12:00AM
Oil Search managing director Peter Botten says he paid beyond the resource value of his company's PNG stake. Picture: James Croucher Source: TheAustralian
A $5 BILLION battle for Papua New Guinean gas riches involving two of the world's biggest energy majors and New Zealand's second richest man took an intriguing twist this week when local industry stalwart Oil Search changed its entry point and put a big deal under a cloud.
Late last year, when French oil major Total announced a deal of up to $US3.6 billion to buy a controlling stake in New York-listed InterOil's Elk and Antelope fields, there was a related deal in the wings. It is understood Oil Search was set to join the venture by taking some of Total's stake and providing cash to help mop up minority partners.
But the public announcement of the Total deal in December, before the other deal was consummated, and a subsequent slump in InterOil's share price, led to a marked change in the gasfield chess game.
It has meant Oil Search, instead of the designated InterOil, took out the minority partners -- a Swiss-based group of companies known as Pac LNG -- in a $US900 million ($1bn) transaction last week.
The deal breaches a condition in the Total arrangement and gives Oil Search the pre-emptive right to take Total's stake if the deal goes ahead. But the game has a long way to play out.
The biggest player -- Oil Search's PNG Liquefied Natural Gas partner ExxonMobil -- is understood still to be keen to enter the project after being outbid by Total last year and has since been in discussions with Oil Search about ways to do so.
Elk and Antelope, which may contain up to nine trillion cubic feet of gas, or enough for a two-train LNG project, are a major prize because their gas has a simple, cost-effective way to market through expansion of the nearby $US19bn PNG LNG plant owned by Exxon, Oil Search and Santos.
It is understood that before the Total transaction was announced in December, the intended accompanying transaction involved the Pac group selling most of its stake to InterOil for scrip at the same time as Oil Search bought equity in the project from Total.
Total was so keen to have Pac out of the project that this transaction was referenced in one of the conditions of its contract, which stipulated InterOil needed to have acquired the Pac interests and shown evidence of this to Total before the deal could proceed.
But when it emerged publicly that Pac's 23 per cent stake in the fields was a potential sticking point, and InterOil's shares suddenly lost one-third of their value, Pac played hard for a better deal. At the same time, there were flagged changes that made Oil Search's entry less appealing.
The two dissatisfied parties then hit on the deal announced on Thursday night that will see Pac, which is run by Swiss-based entrepreneur Carlo Civelli, get cash and Oil Search enter the Elk and Antelope fields in a stronger position at the bargaining table. Oil Search will also have a non-binding agreement to enter another field, known as Triceratops, and more exposure to exploration success.
It is believed InterOil's biggest shareholder, Singapore-based NZ billionaire Richard Chandler, tried to broker a finance deal so InterOil could pay cash for the Pac stake, but this did not eventuate.
How it all plays out will be closely watched and will determine the speed and size of a multi-billion expansion of PNG LNG.
Oil Search managing director Peter Botten, whose 21-year stint with the company has given him strong experience in local acquisitions, has said he paid beyond the resource value of the stake to have the ability to leverage more value.
"Clearly we do have pre-emptive rights and clearly we will be sitting down with InterOil and Total in the short term, and with other stakeholders, to discuss the future," Botten told investors in a call to discuss the deal.
"There is a very strategic play here in terms of our ability to influence the development."
Oil Search has signalled it will do all it can to develop the field by using it to expand the PNG LNG plant, putting it at odds with ambitions flagged for a standalone plant by Total and InterOil.
Botten did not rule out a standalone development but said development should be done through the quickest, most capital-efficient method.
Expanding an existing plant would be a much quicker development and, assuming the Exxon-led PNG LNG partners are happy to negotiate a realistic entry price, a much cheaper option.
That a deal needs to be brokered with Exxon to bring the gas into the existing project has raised speculation Oil Search is planning to deliver to the oil major the equity stake it was unable to buy from InterOil in previous talks.
Deutsche Bank analyst John Hirjee says Oil Search will not have the appetite to buy Total's designated 61 per cent stake but could exercise its pre-emptive right and sell it to a third party.
"Oil Search's pre-emptive right offers Exxon a potential opportunity to enter the Elk/Antelope joint venture," Hirjee says.
Total, which has been silent on the Oil Search move, is not likely to exercise its right to walk away from the deal just because Oil Search, instead of InterOil, has mopped up Pacific LNG.
And Oil Search is expected to use its pre-emptive right as a bargaining tool to steer development paths and joint venture structure rather than be keen to quickly exercise it.
With Total understood to be keen to sell its stake down to 30-40 per cent, there is even a chance of a quick outcome if Exxon is happy with a 20-30 per cent stake and the pair can come to a sensible deal price.
Oil Search is being advised by Goldman Sachs and InterOil by Credit Suisse.
