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InterOil Is Well On Track

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I am pretty sure of one thing about the oil and natural gas industry: To play a major role in LNG, the South Pacific is the place to be. One company with operations in the region is InterOil (NYSE: IOC  ) . Let's find out the company's prospects in the hot and happening LNG market.

Aussie stake
InterOil's operations are concentrated in Papua New Guinea. The company will soon make a final decision on its $6 billion Gulf LNG project in the area with an initial capacity of 5 million tons per annum (mtpa). The project, to be built in phases, is a joint venture with Pacific LNG and will have a total capacity of 10 mtpa.

A company generally looks to secure sale contracts of around 85% of the total capacity to invest in a project. InterOil has secured a preliminary sales agreement with Gunvor to supply 1 mtpa of LNG for a period of 15 years, commencing in 2015. This comes after a similar pact with Noble Energy (NYSE: NBL  ) to provide 1 mtpa of LNG. These two agreements combined with the pact with the Philippines' EWC take the total LNG supply commitment to 2.3 mtpa, a little short of half of the facility's total capacity of 5 mtpa. InterOil is confident that it will be able to secure additional sales contracts of 2 to 3 mtpa in the next few months.

Why South Pacific?
The presence of LNG reserves is the reason that so many oil companies, including biggies like ConocoPhillips (NYSE: COP  ) , Chevron (NYSE: CVX  ) , and ExxonMobil (NYSE: XOM  ) , are building bases in the South Pacific. Add to this the fact that the region is close to the lucrative Asian market, and the picture gets even better.

Papua New Guinea is estimated to hold 226.5 billion cubic meters of natural gas reserves that can be commercialized through LNG terminals. The acreage offers a good opportunity for InterOil to cater to the huge demand for LNG in the Asian markets. InterOil will also be able to charge the higher price that's prevalent in the Asian market compared to that of the American and European markets.

Foolish bottom line
The South Pacific is offering new avenues of growth to natural gas firms, and InterOil is trying to make the most of the situation by building new projects. Once it secures sales agreements for the remaining capacity (we have no reason to believe it cannot, keeping in mind the demand from Asia), InterOil has a great opportunity to boost revenues.

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Fool contributor Amitabha Chakraborty does not own shares of any of the companies mentioned in this article. Motley Fool newsletter services have recommended buying shares of Chevron. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.

Read/Post Comments (3) | Recommend This Article (1)

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Help us keep this a respectfully Foolish area! This is a place for our readers to discuss, debate, and learn more about the Foolish investing topic you read about above. Help us keep it clean and safe. If you believe a comment is abusive or otherwise violates our Fool's Rules, please report it via the Report this Comment Report this Comment icon found on every comment.

  • Report this Comment On December 21, 2011, at 3:21 PM, APM72 wrote:

    Interesting article. I believe the thesis is correct. Trouble is that the Interoil Elk/Antelope field alone holds (best independent resource estimate) 268 billion cubic meters of gas, not the 226.5 billion claimed by the article for the whole of Papua New Guinnea. A new structure scheduled to be spudded by IOC this month may hold as much or more if the seismics are accurate. The structure is already known to contain natural gas.

    The above numbers don't even consider the Exxon project fields.

    I always worry when I see bad numbers. Just sayin...

  • Report this Comment On December 21, 2011, at 4:56 PM, wapitidropiti wrote:

    Motley fool has mean mouthed this project for three years. What has changed?

    Did you finally go long?

  • Report this Comment On December 21, 2011, at 5:01 PM, dcgatlanta wrote:

    I disagree with the bull case for Interoil. A couple salient points...1) Does IOC have any proven reserves? They've been drilling for years, and last I checked the company has No reserves and 2) Who will pay for the $6B LNG facility? I'll believe that project is viable when someone writes a check to pay for it.

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