Did energy exploration company InterOil (IOC) lie to investors in a 2008 investor presentation?
An InterOil skeptic (who stands to benefit financially if the company collapses) contends that it did. And the skeptic has now provided a bunch of new information and analysis to back up this claim.
As we explained here, the skeptic’s allegation is that, in a December 2008 investor presentation, InterOil misrepresented the size and character of a rock oil/gas reservoir it had discovered in Papua New Guinea. (For more background on InterOil, see “Is InterOil Just A Gigantic Fraud?“)
The company described the reservoir as “world class,” with a “proven thickness, porosity, and deliverability.” The company said the reservoir was huge, extending thousands of feet deep.
The InterOil skeptic says this is bunk. At the time the company made the presentation, the skeptic says, InterOil had found so such thing. In fact, says the skeptic, the company’s geologists had described finding a much smaller reservoir that was in no way “world class.” The company was misleading investors, the skeptic contends, in order to keep its stock price high and the exploration money flowing.
When we reported the skeptic’s contention, many InterOil bulls quickly weighed in to defend the company. InterOil had been talking about the reservoir discovered at its Antelope drilling site, the bulls said, not the Elk drilling site its geologists had been referring to. The Antelope reservoir matched the description the company gave in December, 2008, the bulls said. Thus, the skeptic was comparing apples and oranges, and InterOil did not lie in its investor presentation.
Well, we shared that argument with the InterOil skeptic. The InterOil skeptic howled with derision and sent us an InterOil drilling report showing that, as of the date of the investor presention, InterOil had not yet drilled far enough into the Antelope site to have been describing the Antelope reservoir. The company had to have been describing Elk, the skeptic said, and the reality of Elk did not match the company’s description.
Lying to investors is serious business. So we put the question to a well-informed company defender:
In the December 2008 presentation, had InterOil been talking about Elk or Antelope?
The defender had an interesting response:
InterOil had NOT been describing Antelope, the defender said. InterOil had been describing Elk. BUT… InterOil had not been describing the first Elk drilling site–Elk-1–which is what its geologists had been referring to. InterOil had been describing a second drilling hole at Elk, ELK-2!
Elk-2, the company-defender said, had been a disappointment in one respect, which was that it had flowed water, not oil or gas. But the Elk-2 hole had revealed the massive “world class” rock reservoir that the company described in its 2008 investor presentation.
This contention sounded reasonable, so, naturally, we took it back to the InterOil skeptic. Once again, the InterOil skeptic howled with derision. He then sent us the letter we have reproduced below, along with a half-dozen other documents and drilling reports.
THE BOTTOM LINE: Based on his reading of the company’s drilling reports, the InterOil skeptic believes there is NO WAY the company was describing Elk-2 in the 2008 investor presentation, because Elk-2 did not match the description provided. InterOil, the skeptic contends, was simply lying.
Here’s the skeptic’s letter. We look forward to hearing the company-defender’s response.
This is getting amusing… they tell us that these wonderful reservoir properties which they have proven relate to Elk 2. I guess that is more plausible than Antelope because they had not drilled Antelope when they said those things. But the full quote is – and I repeat it:
The carbonate limestone’s have a proven thickness, porosity and deliverability in PNG that qualify as a world-class reservoir.
The porosity Elk-2 is clearly better than Elk 1 – but it is not –as that quote suggested – thousands of feet thick.
Here is a log of the Elk-2 well from an Interoil presentation. I believe this log because it also matches an academic paper published by Interoil’s own geologists. (I have attached both the presentation and the academic paper.)
In it we have 17 meters at the top of the well with estimated 5.2 percent porosity, 50 metres in the middle at 4.8 and a 43 plus 86 meters more in the bottom of the well. These are considerably better numbers than Elk-1. They do not add up to thousands of feet of proven thickness but this much reservoir would be a real find if it flowed.
Alas when Interoil presents, it sometimes (indeed quite often including in the presentation I have attached) give the reservoir specifics of Elk-2 and the flow rates of Elk-1. I can’t find a published flow rate for Elk-2 but I believe it to be low.
Both the academic paper and the presentation describe the fractures as “partially conductive”. This means they flow some gas. The academic paper notes that the fractures are more likely to be “conductive” in Elk-1 and that “partially conductive” fractures are more common in Elk-2. The partially conductive fractures obviously won’t produce gas at the rapid rate that fully productive fractures did in Elk-1 – which is why (I think) there is no published flow rate for Elk-2.
Saying we got this drill hole with a great flow (but lousy reservoir) and another with a great reservoir (but lousy flow) does not cut it.
So what did Elk-2 flow?
I have also attached all six drill reports from Elk-2. They can be found on Interoil website. Let’s start with the good bit. Drill report number 5 mentions oil.
Multiple oil indicators have been observed throughout a 594 foot section of the Puri and Mendi limestone, from 8,754 feet (2,668 meters) to 9,348 feet (2,849 meters). These indicators include recovery of oil/condensate in the drilling mud, florescence in cuttings, and oil/condensate recovered in core sections.
In this case I believe them. The flares from this well burnt with a sooty flame – the only sooty flame in any of the Interoil flare-photos. Soot indicates longer chain hydrocarbons (eg oil, some longer condensates).
The oil did not flow – just “indicators”. But oil nonetheless. [Oil is fabulous if you find it because to extract it you only need to run a pipe to the river and then put it on a barge. You can do that with not very much capital – which means Interoil could become self-funding… oil changes everything… Alas the only flowing oil that has ever been found in the area (Puri-1) went to water after nine days.]
The only problem is that the words FLOW only appear in a few senses in the Elk-2 drilling reports. Here is a quick summary of the reports:
Drill Report 1 indicates “trip gas”. “Trip gas” is gas bought up by the equipment when you pull it up the well (say to change a drill bit). Trip gas is presence-of-hydrocarbons but is not indicative of a find. In this report they indicate the trip gas contains longer-chain (c2-c5+) hydrocarbons (condensate). This I think is real – as per the comment about oil.
Drill report 2 just tells you where they are drilling. No find is reported at all.
Drill report 3 again talks about “trip gas” including condensate.
Drill report 4 was a more extensive:
In the limestone reservoir, persistent background and connection gas was encountered. Background gas ranged from between .07% to 0.7% with C1 (Methane) to C5 (Pentane) and connection and trip gas ranged between 0.18% and 16.07% with C1 and C5.* Gas analysis results from onsite testing indicated heavier gas compositions as the well was deepened.
They also conducted their first flow test on the top of the Puri Limestone.
Prior to coring operations, an interim Drill Stem Test (DST) was run on the top of the Puri limestone with the following results:
• Natural gas flowed to surface with limited flow at the flare.
• Confirmed minimum gas column projected to be 2,346 feet (715 meters) from highest known gas in Elk-1 to top of Puri in Elk-2.
• No formation water was detected during natural gas flow to surface.
• Down-hole pressure was recorded to be 3,332 psi at 7,343 feet (2,238 meters) and was still building after the 12 hour shut in period was complete.
Now there are a few things to note here. There is gas – but limited flow to the surface.
The pressure in the well however is high but the build-up of pressure after the test was slow. This indicates that the porosity is not great. The pressure build up should be instantaneous. [Admittedly the company has been saying the pressure build-up in Antelope 2 is instantaneous.] In other words this flowed but not very well.
Drill report 5 has the description of oil indicators (as noted above). However it does not mention the word flow at all.
Drill report 6 covers the period where the well hit water. That was at 2675 meters. Note the dark blue line in the diagram above. All the stuff below that line has fractures – but it is not that relevant because the fractures FLOW WATER not GAS.
Now go back and look at the diagram above. Above the water line we have 17 meters of net pay. This thus is a great reservoir – its just a great water reservoir.
Now I am being a little harsh on them here – because they flowed the water at a large rate – and that water was saturated with gas which could be flared at the surface. To quote:
The fracture conductivity was supported by the DST’s which resulted in flow capacities (kh) as high as 472,000 millidarcy-feet and water flow rates of up to 2,565 barrels per day in lower part of the well. The produced water had high gas saturation which separated and was flared at the surface during flow.
However in the test they mention that the flows above 2675 meters were not great. To quote:
The formation above 8,777 feet (2675 meters) was tight and small amounts of gas and no liquids were recovered.
Summary
If anyone thinks that Elk-2 was the well they were talking about when they had “proven thickness, porosity and deliverability” then they have not read the drilling reports.
I stand by my view that InterOil CEO Phil Mulacek made statements contradicted by his own geologists.
So there you have it. Did InterOil lie to investors in December 2008? We look forward to hearing from the company defenders.
See Also: Is InterOil Just A Gigantic Fraud?
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