(EnergyAsia, August 28, Friday) — Papua New Guinean upstream company Oil Search Limited said its profit for the six months ended June 30 2009 plunged to US$35.6 million from US$133.3 million reported for the same period last year. The company attributed the fall to lower oil sales and weaker oil prices stemming from the global slowdown.

The Australia-listed company said first-half revenue was US$185.1 million, 60.3% lower than the same period last year. The revenue was based on oil sales of 2.99 million barrels, compared to oil production for the period of 3.26 million barrels, due to timing of shipments. Closing oil inventory at June 30 2009 was 420,000 barrels, which is expected to be largely unwound in the second half of the year.

The company had a cash position of US$410.5 million and was debt free throughout the period to the end of June 2009.
Oil Search added that the board has approved the payment of an unfranked interim dividend of two US cents per ordinary share, payable on October 9 2009.

The company said the first half of the year was highlighted by the major advances made by the Papua New Guinea Liquefied Natural Gas (PNG LNG) project, with all targeted milestones achieved. This included reaching alignment on commercial terms for LNG offtake with three customers covering 4.3 million tonnes per year (t/y) with the remaining two million t/y awaiting final approval of various stakeholders.

Significant progress was also made on securing a project finance facility with a comprehensive term sheet negotiated with the export credit agencies (ECA) during the period. The project remains on track for a final investment decision (FID) by the end of 2009.

Oil Search said it is an advanced stage of finalising the terms for the sale of an effective interest in petroleum development licence 2 (PDL 2), including a 3.5% interest in the PNG LNG project, to Abu Dhabi’s International Petroleum Investment Corporation (IPIC).

Oil Search said funds received from the sale will be used to progress a range of growth initiatives, primarily designed to lay the foundations for further expansions and growth in LNG and other gas based industries in Papua New Guinea as well as help finance its share of the capital costs of the project.

A major strategic review started in the first half of 2009 and is expected to be completed by the end of the year. Substantial work has been carried out on this review, focused on defining new, long term value and growth opportunities for the company.

Oil Search said it has recently been awarded seven mineral exploration licences in the PNG Forelands area, covering a total area of 17,500 sq km. These licences have been acquired to explore for coal seam gas (CSG). While relatively unexplored, substantial coal seams have been penetrated by petroleum wells in the area and initial analysis indicates the seams have the potential to contain CSG. The company said the acreage acquired provides it with a dominant position in this new play type in PNG and complements the company’s strong position in conventional gas.

Peter Botten, Oil Search’s managing director, said:

“After seven years of strong growth, Oil Search’s 2009 first half profit was impacted by the steep fall in oil prices resulting from the global financial crisis. The average realised oil price in the first half was US$51.84 per barrel, 55% lower than in the corresponding period of 2008. Together with lower liftings, revenue fell from an all-time high of US$466.7 million in the first half of 2008, to US$185.1 million.

“Total oil and gas production in the first half of 2009 was 3.81 million barrels of oil equivalent (mmboe), 12% lower than in the first half of 2008. This reflected the sale of the producing Middle East and North Africa (MENA) assets in 2008, natural field decline and a number of facility downtime issues, now resolved.”

While a large proportion of Oil Search’s operating costs are fixed, the company said it benefited from its active cost control programme, lower contractor costs and a fall in some input prices, such as fuel and consumables. Cash costs on a per barrel of oil equivalent (boe) basis declined from US$13.96 per boe in the 2008 full year to US$11.95 per boe. Non-cash charges also fell, reflecting a higher proportion of production from low amortisation fields, such as Kutubu.

Oil Seach added that exploration expense was lower than last year due to a reduced level of exploration activity. The effective tax rate of 51% was marginally above the PNG 50% statutory rate for oil due to the non-deductibility of exploration costs in MENA, resulting in an after tax profit for the half of US$35.6 million.

“Most of the focus during the first half of the year was on advancing the PNG LNG project, with all critical milestones completed during the period. Two of the most important achievements were reaching alignment on commercial terms with three major Asian customers for long term LNG sales, with a fourth potential customer awaiting its government’s approval of key commercial terms for the balance of the capacity, and the signing of the umbrella benefits sharing agreement (UBSA),” said Mr Botten.

“The UBSA provides the framework for how a number of revenue streams from the project will be shared between the PNG state, provincial and local level governments and landowners. With conditional arrangements covering the total output capacity of the project and the UBSA in place, the project participants decided in June to invest up to US$600 million in early construction activities, commencing in the second half of 2009.

Production outlook
Mr Botten said:  “As highlighted in the quarterly report, Oil Search expects 2009 full year production to be between 8 and 8.3 million barrels of oil equivalent (mmboe). Production in the second half of the year is forecast to be higher than in the first half, which was affected by a number of unscheduled shut-downs of the production and export facilities.

“Natural decline is expected to be offset by production from the recent development drilling at Kutubu and Moran and the well workover programme. Development activities planned for the second half include one further development well in the Kutubu Agogo area – ADD 5 – and a workover on ADD-4.”