Oil Search Reduces Spending, Drilling to Focus on LNG

By Angela Macdonald-Smith

Feb. 24 (Bloomberg) -- Oil Search Ltd., Papua New Guinea’s biggest oil producer, will cut spending and defer drilling this year to conserve cash and support its share of a $11 billion liquefied natural gas project.

Exploration spending will be slashed by 60 percent to $70 million, from $176 million in 2008, Port Moresby-based Oil Search said in a statement to the Australian stock exchange. The company today reported full-year net income more than doubled, buoyed by a gain on the sale of fields in the Middle East.

The LNG venture partners, led by Exxon Mobil Corp., are due to give the go-ahead by the end of the year for the project, which will more than triple Oil Search’s output. The economics of the LNG project are “robust” even after a slump in crude- oil prices, Managing Director Peter Botten said today. Oil Search follows Australia’s Woodside Petroleum Ltd. and Santos Ltd. in cutting spending to focus resources on LNG expansion.

“They’re sending a signal to the market that they are going to be quite prudent around expenditure over the next year while there’s quite a bit of uncertainty, and they’ve got quite a big capex program in the pipeline,” said Greg Canavan, head of Australian research at Fat Prophets Funds Management in Sydney. “The market will probably look at that in a positive light.

Oil Search rose 15 cents, or 3.3 percent, to A$4.65 in Sydney trading, its highest close for a week. The gain beat a 1.9 percent advance in the exchange’s benchmark energy index.

Lower LNG Costs

Spending on development will fall 20 percent to $130 million in 2009, said Oil Search, which will introduce a dividend reinvestment plan to further reduce cash outflows by $45 million early this year. The company will also review “how the value of our oil assets can be optimized” in line with the development of the LNG project, it said.

Oil Search is “conserving capital for the bigger picture, which is the LNG project,” Fat Prophets’ Canavan said.

There are “tangible signs” the LNG project will benefit from a reduction in cost pressures, Botten said. It’s not possible to say whether the cost will still be in the estimated range of between $10 billion and $11 billion until final bids are received from construction companies, he said.

Bechtel Group Inc. and Chiyoda Corp., the two contractors competing to build the plant, are due to submit bids in the third quarter.

‘Strong Interest’

Initial accords for LNG sales are expected “in the near future,” after “strong interest” shown by a range of buyers in countries including Japan, South Korea, India and China, Botten said. While LNG buyers are “more cautious” about signing contracts now than a few months ago, signals from prospective customers indicate demand for both PNG LNG and from the competing Gorgon project in Western Australia led by Chevron Corp., he said.

The project will be 70 percent funded by debt, mostly from export credit agencies, said Acting Chief Financial Officer Stephen Gardiner. Sovereign risk limits may constrain the amount of debt financing some banks are able to offer, he said.

Oil Search has received approaches from companies seeking to buy part of its stake in the LNG venture and won’t rule out selling an interest, Botten told reporters. The company wants to keep as high as stake as possible, he said. Oil Search is set to own 19 percent of the venture after the Papua New Guinea government exercises its right to take a stake.

Egypt, Yemen

Net income surged to $313.4 million in the year ended Dec. 31, from $137.2 million a year earlier. Profit before one-time items profit gained 70 percent to $240 million, beating a median $235.6 million estimate of six analysts surveyed by Bloomberg News.

Oil Search agreed in April to sell interests in Egypt and Yemen to Kuwait Energy Co. for $200 million to help fund its share of the LNG project. The company had cash of $534.9 million at Dec. 31, including balances held in joint ventures.

Production this year is set to fall to between 8 million and 8.3 million barrels of oil equivalent from 8.6 million last year, Botten said. Proven and probable reserves fell 9 percent to 66.9 million barrels of oil equivalent at Dec. 31 from a year earlier, as discoveries failed to replace production.

To contact the reporter on this story: Angela Macdonald-Smith in Sydney at amacdonaldsm@bloomberg.net