Oil Search to sell stake in LNG project

Oil Search, which is realigning its business to focus on the booming LNG sector, said on Tuesday it was also making its first foray into coal seam gas in Papua New Guinea, with hopes that discoveries could combine with existing gas resources to help expand its LNG business.

Oil Search said it was in advanced talks to finalise the sale of a stake in the Papua New Guinea LNG (PNG LNG) project to Abu Dhabi government-owned International Petroleum Investment Co, and expects to announce details shortly.

Analysts said Oil Search was likely to get more for the sale than the implied A$8 per share AGL Energy Ltd received when it sold its 3.6% stake in the project for $800 million last year, given the significant progress the project has made since then.

“The move would provide the balance sheet required to fund the PNG LNG capital expenditure commitments and further growth projects being targeted, whilst negating fears of a capital raising," Citigroup’s analyst Di Brookman said in a note.

Shares in Oil Search climbed as much as 6.7% to a 13-month high of A$6.19. It was up 5.9% at A$6.14 by 10:46am, compared with a 0.1% slide in the broader index.

With its revenue hit by a steep fall in oil prices, analysts have previously questioned Oil Search’s ability to fund its near-30% equity position in the PNG LNG project, with some investors speculating it would need to conduct an equity raising. The total cost of developing the project is estimated at between $11-$12.5 billion.

Oil Search managing director Peter Botten said the stake sale would substantially boost its balance sheet and doused speculation it would have to go to the market for more cash.

Botten didn’t rule out a potential further equity sale in the LNG project, adding that it may consider it in future if it needs more money to support a growing exploration programme or a possible expansion of the LNG project.

Oil Search reiterated that the two-train PNG LNG project, which will have an annual output of 6.3 million tonnes, was on track for a final investment decision in the fourth quarter and for first gas in late 2013 or early 2014.

The other partners in the project are Santos Ltd, Nippon Oil Corp and PNG landowners.

In a surprise move to boost its gas reserves, Oil Search said it had acquired exploration licenses, covering a total area of 17,500 square kilometres, to explore for coal seam gas in Papua New Guinea.

“The acreage acquired provides us with a dominant position in this new play type in PNG and complements the company’s strong position in conventional gas," Botten said.

Coal seam gas is methane gas that can be found within coal deposits and can be extracted when pressure on the coal seam is reduced, usually by removal of water from the seam.

Botten said venture partners for the PNG LNG project are now studying the economics of third-train expansion, focusing on timing, cost synergies and gas requirements.

Although Botten conceded that there are too many LNG projects in the region that are targeting development in the 2015-2020 timeframe, he said some could be put on a backburner because they can’t secure buyers for the gas.

“If we’re able to put together a good package for gas expansion, then PNG LNG would be a lot more competitive than anybody else’s in the region," he said.

The company posted a 73.3% fall in half-year net profit to $35.6 million, its first profit decline in seven years, due to lower production and a steep fall in oil prices.

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