Total Enters PNG With Natural Gas Exploration Play

By Ross Kelly for Fox Business

French oil giant Total SA (TOT) has made its first foray into Papua New Guinea, taking stakes ranging from 35%-50% in five exploration blocks in a deal that could precede construction of another big natural gas-export project in the impoverished nation.

Australia's Oil Search Ltd. (OSH.AU) said Tuesday it has sold half of its interests in the assets to Total in exchange for the reimbursement of past license costs, and Total will pay part of the cost of drilling for natural gas. No specific price tag was put on the deal.

Total's interest reinforces views by rival oil companies such as Chevron Corp. (CVX) that demand in Asia for cleaner-burning fuels will continue to grow as countries like China look to reduce a reliance on burning coal for power. 

Several big discoveries in Papua New Guinea and offshore Australia have made the region one of the hottest energy-investment plays in the world.

 

Drilling is scheduled to start in the first quarter of next year, and any significant discoveries of natural gas could lead to construction of a new terminal in Papua New Guinea or an expansion of the US$15.7 billion PNG LNG export terminal led by ExxonMobil Corp. (XOM). However, new projects in the region would have to compete against the likely emergence of competing supplies from North America and East Africa.

Jean-Marie Guillermou, a senior vice president at Total, said the deal is in line with the company's strategy of strengthening its presence in the Asia-Pacific region, particularly in the natural gas and liquefied natural gas sectors.

Liquefied natural gas, or LNG, is natural gas chilled to a liquid form and transported by tanker.

In recent years, Total has spent billions of dollars taking stakes in two large LNG export projects under construction in Australia's Queensland state and Northern Territory that will serve customers in Japan, South Korea and Malaysia.

Oil Search is plowing billions of dollars into the PNG LNG project, which aims to ship LNG to customers in Japan, China and Taiwan from 2014.

Papua New Guinea, located immediately to Australia's north and Indonesia's east, has an estimated 22.6 trillion cubic feet of natural gas reserves, according to U.K.-based consultancy Wood Mackenzie, or the equivalent of the U.S.'s natural gas consumption in a year.

That likely underestimates its true potential as Papua New Guinea has only been lightly explored for oil and gas up to now. According to Canada's Talisman Energy Inc. (TLM), only a few thousand kilometers of seismic data has been acquired throughout the country since its independence in 1975.

In February, Japan's Mitsubishi Corp. (8058.TO) agreed a US$280 million deal to buy stakes in several natural gas discoveries and prospects in the forelands area of western Papua New Guinea from Talisman.

Oil Search owns 29% of the PNG LNG project and along with partners Exxon and Santos Ltd. (STO.AU) wants to expand the development to three LNG production units, or trains, from the two under construction.

In recent presentations to investors, however, the company has put more emphasis on the Gulf of Papua's potential to underpin construction of a new standalone LNG development.

"In the event of exploration and appraisal success that leads to an LNG project, Total would develop and operate the downstream facilities of any development," Oil Search Chief Executive Peter Botten said.

At 0126 GMT, shares in the Australian company were up 3.6% at A$7.81 as investors embraced the introduction of a large, experienced partner.