Exclusive: PNG LNG's high-five

MORGANS Financial is breaking with the consensus among its analyst peers believing Elk-Antelope can support two new PNG LNG trains alone, without the support of the Muruk and P’nyang fields, and the Papua New Guinea election will be the trigger to make it happen.

Exclusive: PNG LNG's high-five PNG LNG tanker.

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Energy News has learned that Morgans believes the election, which is due to wrap up in the next week with a new government to be installed in a month or so - is the final catalyst that will see Total-operated Elk-Antelope in PRL 15, supporting the planned Papua LNG, linked to the existing PNG LNG plant.
 
RBC Capital Markets also said this week that PNG operator ExxonMobil, Oil Search and Total will "move quickly" once the new government is sworn in to secure commercial agreements for two more trains.
 
However, Morgans is more bullish than that, believing that three trains are on offer, based on its $US70/barrel price target by 2020, though Qatar's move this week to lift its LNG output could help de-link it from oil anyway. 
 
In either case, Morgans believes PNG LNG will expand to five trains rather than four, and expects the joint venture to submit the formal cooperation agreement in September, for the new government to approve by the end of 2017.
 
"Our view is that Elk-Antelope on its own could potentially support two trains," Morgans senior resources analyst Adrian Prendergast told Energy News.
 
"My view is that Elk-Antelope will be trains 3 and 4, and then Muruk and P'nyang will be Train 5, so I'm at the top of consensus for valuation."
 
If Oil Search boss Peter Botten's attempt at getting ExxonMobil and Total to collaborate on the two projects by announcing a takeover of InterOil had failed and Total were to go it alone on Elk-Antelope, Prendergast believes it would be one stand-alone train.
 
Instead, ExxonMobil took over InterOil, and the opportunities for collaboration have improved the outlook.
 
"The current resource is 6.5 trillion cubic feet for Elk-Antelope; then P'nyang is 3.5Tcf; while Muruk has not yet defined the resource but the target is 1-3Tcf, I think it'll come in at the 2-3Tcf range," Prendergast said.
 
"Put all that together and you have 12-13Tcf, which will be enough to justify two trains."
 
He said the election would give stakeholders confidence in the timing of sanctioning from the government, the participation of the government, and smooth sovereign risk concerns not unusual around any election year for a developing economy.
 
Both sides of PNG politics support the LNG sector. The opposition party sanctioned PNG LNG in the first place in 2009.
 
Prendergast said analysts tend to either give high value to additional trains being developed and to growth, but have a lower oil price deck that doesn't give a huge amount of value to Trains 1 and 2; or they give a lot of value to the first two trains then heavily risk-adjust Trains 3 and 4.
 

Oil price linkage

 
Yet Prendergast said his firm's $70 price deck was still conservative in the bigger picture, given what's happening to LNG spot pricing.
 
"In the long-term, by the time you get to when these projects get developed, the main pricing mechanisms for LNG offtake agreements will be indexed off the LNG price itself, not oil, which will be healthier than the slope we'd apply to a $70 oil price anyway," he said.
 
"That will be just as inviting as what we're forecasting now. So while we're bullish on oil, when you translate that into LNG forecasts for us, it's quite reasonable."
 
RBC's Ben Wilson said this week that Qatar's move to lift its LNG exports to a third of the world's current LNG supply by 2024 would unlikely help de-link spot gas prices from oil.
 
He revealed data that showed Qatar has maintained contracts with a high degree of straight-line oil linkage. 
 
Over the period of time when oil prices averaged $90-100/bbl, Qatar delivered LNG prices to Japan at levels 10-15% higher than Australian volumes, which Wilson said was indicative of a higher slope relative to oil. 
 
Qatari volumes have entered Japan at lower prices than Australia since the oil price collapse in 2014, which he said was a construct of the straight-line contracts out of Qatar versus some of the Australian contracts which have downside protection. 
 
"We think it is reasonable to assume the Qataris want to recapture market share or at least maintain market share in a growing total market without collapsing the straight line oil linkage," Wilson said.
 
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