Evidence says InterOil's gas isn’t commercially viable

ADAM GEFVERT | Seeking Alpha

INTEROIL IS A VERY CONTROVERSIAL oil and gas company. Lately, there has been a lot of excitement about the company reaching a potential deal with a major partner to operate it's Papua New Guinea gas wells.

However, I continue to believe that a major operator will never sign with IOC. So much recent damage has come to the company, such as reports it's refusing to show Royal Shell its well data, liquidity problems, and news that George Soros liquidated his position, that it won't be able to recover.

I have recently done a lot of research on the company and have dug up some interesting information from various sources. Some of these are experts in the field of oil and gas exploration, others are experienced investment analysts. I am sharing some of what I learned.

InterOil's CEO, Phil Mulacek, claims that InterOil and Royal Dutch Shell are in negotiations over making Shell the operator of InterOil's Elk-Antelope gas fields in PNG. Royal Shell's CFO, Simon Henry, also claims that they have had discussions over "quite some period of time."

However, now things don't seem quite right. Mr. Henry is quoted as saying: "At the end of the day we haven't been in the data room and we're not in an ongoing discussion. It's very difficult to have an interest in the asset that the license holder (InterOil) doesn't want to talk to you (Shell) about."

There is strong evidence that the wells don't have the gas that IOC claims. First off, the company still has not done an SEC-compliant resource estimate. This is after three years of discovering the Antelope-1 and Antelope-2 wells in 2009, and four years of discovering the Elk-4 well in 2008. Instead, the company got an independent resource estimate from Candian firm GLJ.

Secondly, IOC has been drilling in an area of PNG around the Puri Creek that has been known to contain hydrocarbons. Companies have tried to drill in this area for decades, but to no avail. If IOC had really managed to find significant oil or gas in this geography, then it will be the first company in history to have been commercially successful.

Here is a newspaper article of a partnership between BP and a company called Vacuum Oil from 1958, which initially looked like the company had stumbled upon quite an oil well. You can see that this well was also in Puri Creek and it had generated quite a bit of excitement in the stock (some things don't ever change).

But then, as shown in this article, it was found that the first great oil flow was never found again. The rest of the well was just water-bearing.

Another company called Kundu Petroleum drilled a well in the 1980s, but eventually went bankrupt.

A company called Cheetah Oil and Gas had a petroleum retention license to explore in a PNG field that showed some gas from the 1950s, and the stock now trades at $0.02.

In addition to these examples, much more exploration has been conducted and wells drilled with no commercial success in the carbonate reservoirs around Puri Creek. There is just too much water where oil and gas were expected to be. Over the decades, oil and gas companies have always let their licenses expire in Puri and moved further west to explore PNG's sandstone reservoirs.

I believe there are no more outs for InterOil at this time. The PNG government has pressed it to find a major partner, the company appears to be trying, but delays continue.

It should give an investor no comfort that the PNG government continues to support InterOil. InterOil is the only oil and gas company they have to work with in the Puri Creek areas. It's like if you had someone around to clean your yard and he was doing a bad job, but you had no one to take his place. You would have no choice but keep him around.

InterOil has reached it's peak, got everyone excited, including the media, only to let everyone down with a thud. As more and more IOC investors start getting skeptical, you can expect the stock to slowly drift down from here.

Comments

[John Fowke]

Harry and Phil sum the situation up well. What they saw is all true and attested to both by lay observers - like me, present in the area during the heyday of APC and operations at Puri and elsewhere in the area - and others who are technically-qualified and experienced.

The gas-flow at these holes is not in large quantity and is forced up by water-pressure within the porous strata it lives in. If tapped it is likely to run out quickly leaving a lot of angry investors with a lot of artesian water.

This is why APC capped numerous holes in the headwaters of the Era, Kikori and Turama/Omati rivers in the late 'fifties thru to around 1961.

I've travelled to the headwaters of both the Purari and the Era rivers, as well as journeys up the Turama and Omati and have observed not only one or two (I dismantled a steel-framed building at the abandoned Omati site for re-erection at Kikori in 1958) of the sealed-off drill sites, but also observed exposed coal-seams in the banks of the upper Era, and oily seepages back down in the delta of the same river.

All well and truly looked at, going as far back as a major exploratory search across the mid-to-upper areas of the Purari, Era and Kikori by Staniforth-Smith in 1908.

This soon followed by the likes of Papuan Apinaipi, Oilsearch and the post-WW2 BP/Vacuum-( Mobil) - backed Australasian Petroleum Corp..whose Catalina service - run by alleged CIA susidiary Worldwide Airways- used to land three times a week at Kikori. One Catalina still rests there, holed and sunk on a sandbank below the station.

The old prospectors in the late 19th century used to say "there's a lot of gold in New Guinea but there's a bloody big lot of New Guinea mixed with it."

The same probably applies to oil and gas. Philips Petroleum searched and set sub-sea seismic charges off all across the Papuan Gulf in the early 'sixties,with shore-stations on Goaribari and Kiwai Islands and others are now showing interest in areas in the Gulf and off Cape York, so I hear.

But they are concerned with gas, not oil. Many more episodes to follow in this story, one thinks.

[Arthur Williams]

Sat in Baimuru looking south at a wonderful sunset glow in the sky until I realised shoudl be in the west!

You all may recall that there is a huge volume of gas out in Gulf waters and ANG even had planes taking up passengers to drink champagne and fly around the massive flame that some exploration comapny had lit over its discovery of oil down under the sea. So it is there.

Not much faith in the veracity of any of the remaining '7 Sisters' anyway. So who'd you believe in this greedy world.

[Kevin O'Regan]

Google "Phil Mulacek" his biography and income.... enough to keep me away from it all

[Harry Topham]

Phil - As I recall a company called APC sunk numerous exploration wells in the Kikori and Purari river deltas from 1950’s onwards. All the wells sunk were capped.

The buzz word around at that time was - no oil, gas only: a commodity, which at the time was not seen to have any economical potential.

Surely analysis of the results of this earlier exploration by APC would reveal the true picture of whether this latest enterprise has in fact any real ongoing potential for development?

[Jonh Moko]

Can someone in the know explain.

If it is a easy as portrayed in the article that exploration companies, once able to secure a development/mining licence, can easily go on the stock market to raise capital and make some monies out of such transaction?

Is it that simple and straight forward like this for schemers to exploit unsuspecting PNGeans?

Interested for more information from mining capital traders...

[Northern Light]

The author of this article is short the stock and betting on its decline, I think his credentials included being a professional card player

He's replaying hype he's heard from hedge fund bashers.
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Unlike 'Northern Light' he did disclose in the original article both his dientity and that he is shorting the stock. Furthermore, his view on InterOil's credentials are widely shared - KJ

[Phil Fitzpatrick]

As I understand it in PNG you get oil and gas reserves in sandstone or in old reefs that were once in the sea.

The former usually contain large reserves while the isolated reefs only contain little pockets of oil and gas, which are seldom economically viable - at best they are a nice add-on to a big sandstone reserve.

I've heard that InterOil's discoveries are in reefs. When you drill into them you get an initial good show but further investigation usually shows them to be very localised and small.