Can You Profit From This Natural Gas Odd Couple?

The strangest of partnerships can be forged in the pursuit of profits. Last week we saw the Papua New Guinean government up its stake in local natural gas developer InterOil (NYSE: IOC  ) – but will it be enough support to transform the company into an Asian natural gas giant?

Feeding the Asian energy machine
With so many investors focused on the oil and gas boom in the United States, it's hard to look at an integrated company which only operates in Papua New Guinea and not say: "Who cares?" Well, the largest energy consumer in the world cares.

In 2007, China transitioned from a net producer of natural gas to a net consumer, and today it consumes 1-trillion cubic feet (Tcf) more per year than it's able to produce – and that demand is getting bigger by the day. The Chinese government plans to increase the share of natural gas as part of total energy consumption from 4% to 10% by 2020. If it can't find adequate natural gas sources within its own borders, it will import shipments of liquid natural gas (LNG). If a country as close as Papua New Guinea could supply Chinese demand, the rewards for those supplier companies and countries could be huge.

This is where InterOil comes into play; right now it claims to have reserves of 8.59 Tcf of gas and another 0.7 Tcf in condensate form at its Antelope and Elk gas fields. Unfortunately, it doesn't have the drilling capacity or the infrastructure in place to transport and export the gas. This past summer, rumors abounded about a possible partnership with Royal Dutch Shell (NYSE: RDS-B  ) , but when InterOil wouldn't let Shell take a look at its operations, the talks seemed to wither away.

Where companies don't want to venture, though, it appears the Papua New Guinean government will. Yesterday, the company announced that the Papua New Guinean government will take a 50% stake in both the Elk and Antelope fields. With government backing this venture so heavily, InterOil potentially could solve some of the headaches it has faced with drilling, building pipes, and constructing an LNG port. If these projects become successful, then InterOil could go head-to-head with ExxonMobil (NYSE: XOM  ) for the title of lead producer in Papua New Guinea.

What a Fool believes
There are still a lot of "ifs" involved in the investing thesis for InterOil: If it can get its pipeline network built out; if it can build its LNG port; if the proven reserves are indeed what the reports claim to be. Granted, the prize of being a major supplier to the Chinese and other Asia-Pacific countries could make for some great returns, but the company has made some odd moves regarding the reporting of its proven reserves and its operations.

Investors who think LNG supplies to China will be a big driver for the oil and gas sector might consider two other country and company pairings as well. There are two operations in Australia: Conoco Phillips' (NYSE: COP  ) LNG liquefaction facility in Darwin, and Chevron's (NYSE: CVX  ) proposal to build a LNG liquefaction port on Barrow Island. Also, construction is under way to build an LNG liquefaction port in Oregon, which could be used to transport gas from the Green River Basin shale play in Wyoming. Companies like Devon Energy (NYSE: DVN  ) and Ultra Petroleum (NYSE: UPL  ) , which both have large gas plays in the Green River Basin area, could stand to make solid profits from exporting natural gas.

The ways to play the energy space are almost countless, but which is the right one? Our analysts at the Motley Fool keep a keen eye out in this space, and they've identified "The Only Energy Stock You'll Ever Need." We have made a special report outlying this unique opportunity within the oil and gas space. For your own free copy, click here.


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  • Report this Comment On November 20, 2012, at 12:50 PM, 2timfoolery wrote:

    It's hard to know where to begin to comment, as the article is filled with slipshod information.

    First, the government is exercising an option in investing in LNG facilities and in the Elk/Antelope field. Apparently other major players are ready to buy into both opportunities as soon as the government states its investment decision, likely early next month.

    Second, there have been no "odd moves" by IOC in reporting proven reserves or operations. Independent third parties have stated what the Ng resources in the ground are. There have been no accounting surprises.

    Third, Shell has been an unwelcome party, a spoiler, in the proceedings between the PNG govt. and IOC. Other super major oil cos. such as XOM and COP and the national energy companies of China, India, Korea, and Japan have been looking over the opportunities in IOC and several bids are in hand, but under confidentiality agreements.

    Last, the Aussie based NG projects are in trouble, with very high costs, and many low payoff coal methane wells to get much out. In contrast IOC has world class gas well and very deep NG formations. They are a low cost producer when all is put together.

    The author needs to dig more deeply and report more accurtely.

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