By Ross Kelly
SYDNEY--Total SA's (TOT) foray into Papua New Guinea has gotten
off to a shaky start after two exploration wells failed to find
much natural gas, according to the French company's Australian
partner in the project.
Oil Search Ltd. (OSH.AU) said in a statement Tuesday that the
first two exploration wells in a campaign to tap new natural gas
resources in the country--Flinders and Hagana--had yielded only
"relatively modest" amounts of the fuel.
Oil Search said both wells, though, had intersected good quality
types of rock--possibly indicating the presence of larger natural
gas reserves nearby that could be targeted with further drilling. A
Perth-based spokeswoman for Total declined to comment, and a call
to Oil Search, whose shares fell 2.6% in Sydney, wasn't immediately
returned.
Papua New Guinea, an impoverished southeast Asian nation that
lies just north of Australia and to the east of mainland Indonesia,
has around 22.6 trillion cubic feet of natural gas reserves,
U.K.-based consultancy Wood Mackenzie estimates--about equal to
U.S. annual consumption of the commodity. That likely
underestimates the true potential, however, as the country has so
far only been lightly explored for oil and gas.
Recent big discoveries by the likes of Exxon Mobil Corp. (XOM)
have transformed Papua New Guinea, better known for its jungles and
lawlessness, into one of the world's hottest energy plays. Its
promise as a hub for new sources of natural gas has begun to lure
an increasing number of larger oil companies, including Total,
looking to feed Asia's growing appetite for fuels that burn cleaner
than coal.
Rival Exxon's US$19 billion liquefied-natural-gas project,
dubbed PNG LNG, is among the more advanced in Papua New Guinea. The
facility is scheduled to ship its first LNG cargos to Japan, China
and Taiwan next year, while more recent gas discoveries have led
Exxon and its partners already to begin planning an expansion of
the project.
Aiming to mirror Exxon's success, Total last year bought stakes
ranging from 35%-50% in five exploration blocks owned by Oil Search
in the Gulf of Papua that it hoped would underpin the creation of
another big LNG plant in the country. The French oil producer has a
strong foothold in the Asia-Pacific region already, having spent
billions of dollars buying up stakes in two large LNG projects in
neighbouring Australia.
Total bought into the Papua New Guinean blocks by promising to
cover the drilling costs for Oil Search, a much smaller player. No
specific price tag was ever disclosed.
Andrew Williams, an analyst at RBC Capital Markets in Melbourne,
said the first two wells hadn't delivered a significant discovery,
but described the drilling results as "mixed" in view of the
quality of the rocks encountered by the wells.
"The play remains high risk but encouraging enough to commit to
another well in the current programme," Mr. Williams said, noting
that Oil Search had identified more than 30 potential drilling
prospects in the area. Hagana is still drilling ahead to its
targeted depth, while a third well is also being prepared.
"Although the volumes at Flinders and Hagana are likely to be
relatively modest, the company has been sufficiently encouraged to
take up a further well option, and will drill the Kidukidu prospect
once Hagana-1 is completed," Oil Search said in its statement.
Underscoring the country's perceived potential, Exxon has also
started talks to invest in U.S.-based InterOil Corp.'s (IOC) Papua
New Guinean natural gas assets, and Japan's Mitsubishi Corp.
(8058.TO) agreed, in February, to a US$280 million deal to buy
stakes in several natural gas discoveries made by Canada's Talisman
Energy Inc. (TLM).
Write to Ross Kelly at ross.kelly@wsj.com
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