Actor Shia Labeouf, the star of the forthcoming Wall Street 2, recently pumped the stock of an obscure oil-and-gas company in the pages of GQ: InterOil (IOC).
“IOC’s momentum is major,” said Shia, “and it will surprise to the upside.”
Naturally, we wondered what an actor was doing humping the stock of a little energy company in a magazine, so we made some calls to see if he had been paid for the tout. We uncovered some juicy stuff, but were unable to determine the answer.
We have, however, received a copy of a fascinating investigation into InterOil’s operations in Papua New Guinea, which we’re publishing excerpts of here. This investigation provides further fodder for those who suspect that InterOil’s claims of a vast natural gas discovery are not what they appear to be.
We’ll walk through excerpts of this investigation in the following pages. But first, some background.
INTEROIL: A CONSPIRACY-THEORIST’S DREAM
Regardless of Shia Labeouf’s motivations in touting InterOil’s stock, the motivations of others in the story are clear.
The company’s management and investors want to keep InterOil’s appearance of “major momentum” alive, at least until they can sell a big stake in their energy resources to a partner. A decade ago, the company acquired the rights to some land in Papua New Guinea that several other energy companies had explored and abandoned. Since then, for InterOil, it has been one exploration and press release after another–and a stock that has soared from next-to-nothing to $3 billion of market value and $65 a share.
A platoon of shortsellers and skeptics, meanwhile, have been decrying InterOil’s claims from the beginning (and, recently, they have been getting killed in the market for doing so). These skeptics point to litigation, early drilling disappointments, and a cast of colorful characters including the company’s founder and CEO, Phil Mulacek. They believe that InterOil hasn’t really found much of anything, and they want the whole InterOil kit and kaboodle exposed as a fraud. (Further background on the InterOil debate here.)
We haven’t made up our minds about InterOil yet. We’re new to the story, and we’re not oil-and-gas analysts. But based on what we’ve read and seen so far, we doubt the story is going to end quietly.
Either InterOil will finally make an undisputed discovery that proves its critics wrong once and for all–in which case the company will actually start producing liquid natural gas, the short-sellers will go bust, and the stock should soar. Or the whole thing will flame out like a gas flare.
With InterOil now conducting crucial new tests on its latest “world-record” gas drilling site and trying to sell a portion of its energy interests to a big-energy partner, the thrilling conclusion is likely to come soon. So it’s high-time we tuned in.
THE CONTROVERSY
The vast majority of InterOil’s market value is the hypothetical future value of the natural gas reserves it says it has discovered in Papua New Guinea. The company began exploring the PNG area almost a decade ago, but most of its early test sites flamed out. The latest of these, however, a drill site called “Antelope,” has gotten everyone excited that InterOil might finally have really discovered something. A “flare test” at a site called “Antelope 2” revealed a “world-record” level of gas pressure–a development that the company quickly bragged about in a press release. As usual, InterOil boosters got excited, while its critics denounced the announcement as yet more sizzle with no steak.
Importantly, as yet, InterOil has not actually produced anything from its exploration efforts. All it has done is conduct initial tests and estimate the extent of natural gas and “condensate” reserves that lie beneath the ground. The company is now hoping to sell a stake in these interests to a partner (perhaps a Big Energy company like ExxonMobil) and then begin developing a liquid natural gas (LNG) production and refining business.
But first, it must prove that the reserves actually exist.
InterOil’s gas reserves have now been estimated and vouched for by an independent Canadian company, GLJ Petroleum Consultants. InterOil also has a very well-respected geologist, David Holland, on its payroll. Many major energy companies have examined the company’s data, and none appears to be crying “fraud” (although the company hasn’t managed to sell a stake in its claims, either).
But that hasn’t stopped the skeptical grumbling. Recently, when InterOil announced that the results of the latest important drill test on its Antelope 2 site would not be completed on schedule, one analyst derided the news as “the dog ate my homework.”
NEW EVIDENCE THAT INTEROIL IS A GIGANTIC HALLUCINATION?
A few days after we reported our Shia Labeouf findings, we received the primary investigation of InterOil that we’re excerpting here. We should say upfront that, though the investigation seems fair-minded, the author is an InterOil skeptic. The author will also benefit financially if InterOil’s claims are not what they appear to be.
The investigation provides more background on the history of the Papua New Guinea area that InterOil is exploring, as well as more logic as to why the company’s reserves may not be everything they appear to be.
Importantly, the investigation does not arrive at a firm conclusion. The author spoke with many people familiar with InterOil’s sites in Papua New Guinea, and reviewed the frustrating exploration history of the region. The investigation does not conclude that InterOil is a fraud. Rather, it simply provides more support for the theory that InterOil’s current successes may not, in the end, amount to much of anything.
Specifically, the investigation suggests:
- Far from being a “frontier” drilling site, InterOil’s sites in Papua New Guinea were explored and abandoned years ago by other energy companies. These companies abandoned the site because they had concluded that, despite promising signs, there was not much there there. The investigation’s author believes that InterOil may eventually conclude the same thing.
- The type of rock and gas and oil resources at the InterOil sites have a peculiar characteristic that is a great help if one wants to make exciting announcements and pump up a stock price but of less help if one actually wants to produce energy. Specifically, the sites produce enormous initial pressure of gas and/or oil. Unfortunately, because of the type of rock, they do not actually prove to be promising development and production sites, because the initial pressure is not sustained.
- Visiting the sites, as a bullish Morgan Stanley analyst recently did, will not help one determine the extent of the resources they contain, as nor will the “flare tests” that the company has aggressively advertised. So some of the renewed confidence investors have in InterOil may be misplaced.
- Some of InterOil’s descriptions of the promise of the new site, Antelope 2, don’t add up, in the opinion of the investigation’s author. Nothing particularly alarming, but taken together, enough to remain skeptical of the company’s claims. Especially because critical flow tests have not yet been conducted.
IMPORTANT DISCLAIMER: We are confident in the analytical abilities of the person who conducted this research, but, importantly, we cannot, and are not, vouching for the veracity of any of the conclusions or facts in the report. We present the author’s findings as a conversation-starter, in the hope that you, our readers, will help us sort fact from fiction. We also look forward to hearing the response from InterOil.
See Also:
The background…
Interoil’s gas finds
Almost every well that Interoil has drilled has announced large gas flow rates and one well (Antelope 1) has been promoted as possibly the largest hydrocarbon column found in the history of oil exploration – and certainly the largest column found in Asia. Whatever – almost every well produces a large flare when lit. Here is the picture (courtesy Interoil) of the flare at Antelope 1.
Guinness – makers of beer and purveyors of “world records” – are convinced and gave announced a world record for the flow rate on a single well. This flow rate has been beaten by Interoil’s next well (Antelope 2).
These finds have attracted attention. The stock has been really strong – going from a bottom below $10 to about $80 and back somewhat lately. The company has a new (very) high profile shareholder (Soros funds management). It has also attracted the attention of a major US investment bank (Morgan Stanley). This is important because to develop any gas field is going to take billions of dollars. Morgan Stanley will help Interoil raise the capital. Wall Street –it seems – is getting deep into the jungles of Papua New Guinea.
Source: This excerpt is from an investigation into InterOil’s operations in Papua New Guinea provided to Business Insider by its author. Business Insider regards the author and the report as credible but we have not checked any of the facts or assertions therein. The author of this report will benefit financially if InterOil collapses. It is also possible that the author made the whole thing up. If/when we get responses from InterOil or other seemingly credible sources to this report, we will publish them.
A prominent Wall Street analyst is persuaded — and jumps aboard
Phil Mulacek, InterOil CEO
The Morgan Stanley report
Evan Calio – a Morgan Stanley analyst – knew he was reporting on a controversial company when he initiated on Interoil during September. His opening paragraph dismissed the controversy:
Unnoticed positive exploration and development story creates a buying opportunity. We expect the gap between improving fundamentals and the stock price to close as the new story is understood. We have investigated alleged negative claims, visited every IOC well-site in PNG, conducted due diligence, and analyzed the financials. We expect significant share price appreciation once the market begins to see evidence of transformation led by potential 2009 catalysts: success at Antelope-2 and a sell-down of IOC’s project interest. [Emphasis added in bold.]
The stock jumped about 20 percent the day that Morgan Stanley lent the company its credibility. This initiation was an important step if a few flared wells in Papua New Guinea are going to be turned into a major LNG project. These projects cost over $10 billion on the basis of [a similar] Oil Search – Exxon project.
Interoil claims they can do one for less though the basis for that claim is thin (cost estimates have tended to rise when serious front-end engineering design work is done). [The company behind the other project,] Oil Search has raised their cost estimate as the project has come to fruition (and the competition in my part of the world for skilled labor has increased). Interoil cost estimates are somehow in stasis.
Source: This excerpt is from an investigation into InterOil’s operations in Papua New Guinea provided to Business Insider by its author. Business Insider regards the author and the report as credible but we have not checked any of the facts or assertions therein. The author of this report will benefit financially if InterOil collapses. It is also possible that the author made the whole thing up. If/when we get responses from InterOil or other seemingly credible sources to this report, we will publish them.
This is not an exploration “frontier.” It was explored–and abandoned. Why? Because after much exploration, other companies determined that there wasn’t much there.
Image: InterOil Investor Presentation
The missing history of carbonate oil and gas in Papua New Guinea
One thing missing from [Morgan Stanley analyst] Calio’s coverage of Interoil was a decent history of exploration in that part of Papua New Guinea. History was ignored because this is – in the words of the Morgan Stanley analyst – “frontier oil”.
That is not surprising because whilst there is a long history the company itself does not tell you much about it. Indeed the company regularly says that Papua New Guinea was (as an oil and gas producer) “underexplored and overlooked”.
That anti-historical view is reflected by Morgan Stanley’s Calio. The frontier in this case being gas reserves in carbonate (ie limestone and similar) reservoirs.
All the main hydrocarbon finds (except one) in Papua New Guinea are in what is knows as the “fold belt” where the reservoir rocks are sandstone. The Oil Search/Exxon project takes its resources from the fold belt. There is gas and oil to the east of the fold belt and many holes have been drilled most of which found hydrocarbons. Its not surprising that the gas and oil is present – the same source rock exists deep underground. The difficulties have not been in finding oil and gas – but in finding commercial fields – the limiting factor being that the carbonate reservoirs are particularly difficult.
The idea that this area was under-explored and overlooked is an important part of the Interoil story. If the gas was known about for half a century there would be little reason why Interoil (a relatively recent company) could have pegged such large acreage unless there was something wrong with that acreage. Its important to the Interoil story that the gas finds are new. And they are new – but only in part…
The key acreage – where the Antelope and Elk wells are drilled are areas surrendered by smaller oil companies (notably Auriga Petroleum and Bligh Resources). The companies themselves only got the areas after they were surrendered by British Petroleum, Oil Search and a host of other companies.
Source: This excerpt is from an investigation into InterOil’s operations in Papua New Guinea provided to Business Insider by its author. Business Insider regards the author and the report as credible but we have not checked any of the facts or assertions therein. The author of this report will benefit financially if InterOil collapses. It is also possible that the author made the whole thing up. If/when we get responses from InterOil or other seemingly credible sources to this report, we will publish them.
Previous attempts to commercialize the obvious oil and gas resources also started promisingly…and then failed. Miserably.
Image: InterOil Investor Presentation
The first gas and oil discoveries in Papua New Guinea
Early Western explorers noted many oil seeps and gas emanations in Papua New Guinea. Indeed since 1937 mapping surveys have documented mapping surveys have documented over forty oil impregnations, two oil seeps and more than twenty gas seeps all in the area surrounding Puri Creek – a relatively small area around where Interoil is drilling. The most impressive of these seeps was in Seppi Creek which in 1957 was flowing at an estimated rate of one thousand cubic feet per hour and burnt with a ten foot high flame. The Seppi Creek flare burnt for about a decade.
These signs of oil and gas did not go unnoticed. They are the sort of thing that really interest petroleum geologists and companies. Several prospects were drilled, notably Puri-1, Bwata and Kuru wells. All three found hydrocarbons in what originally looked like significant quantities.
The most famous of these wells was Puri 1 – which – when it was drilled – was probably the most expensive on-shore well ever drilled in the history of the petroleum industry. It was the first well anywhere in the world where the drill rig and staff were entirely delivered by helicopter. Big oil (notably BP) was very interested in the seeps and emanations around Puri Creek.
The well found oil – which originally flowed at 1610 barrels per day. It caused a stock market sensation in Australia – particularly for a minor oil company Vacuum Oil. Here is a report in the Melbourne Newspaper – but the find was considered significant enough to merit an article in the New York Times. The first articles – unsurprisingly – were about stocks soaring on the find. Reports came about that there was some water flowing with the oil – but that “experts from London” were flying to Papua to evaluate the find. The Australian papers went with the conspiracy theories that the lack of strength of the stocks was because of an official policy of “sitting” as heavily as possible on the stock market to stop any big rise. [Its a sign of the times then that the idea that management would manipulate the market price of their stock down was accepted so readily.] Despite water flowing from the well the papers still called this a 1000 barrel of oil per day discovery.
Finally the truth came out. The well flowed 1610 barrels of oil per day on day one. By day 10 it flowed 30 barrels of oil per day plus 116 barrels of water. A second deviated hole was found – but there was no repeat of the oil discovery.
Our intrepid oil explorers however were not discouraged by this very expensive (and well reported) failure. They set up camp 15 miles away and drilled the Bwata well. Other wells were drilled. These flowed gas (not oil) but they had the same properties – which is that the flows were massive (in one case literally blowing the top off the well) but then the flows died rapidly. There were no sustainable hydrocarbon flows – just a spectacular initial flow followed by failure.
One more failure warrants attention. Kundu Petroleum was a small oil and gas explorer listed on the Australian stock exchange in the 1980s. It raised money and proceeded to drill a well about half way between the Bwata and Puri wells. That well became known as Puri-2 – and it was a true debacle. The company bogged all of its equipment and stuffed up in ways that became part of the Papua New Guinea oil wildcatter folk lore. The well was hopelessly over budget and the company disappeared based on a single well. The story is reported in the Sydney Morning Herald, among other places. First they found a partner, and then they had problems with their partner after their expensive failure. Finally they became an object of mockery. (To be fair Puri 2 is several kilometers away from Puri 1 and not in the same structure. One knowledgeable PNG oil guy thinks that well was misnamed.)
Source: This excerpt is from an investigation into InterOil’s operations in Papua New Guinea provided to Business Insider by its author. Business Insider regards the author and the report as credible but we have not checked any of the facts or assertions therein. The author of this report will benefit financially if InterOil collapses. It is also possible that the author made the whole thing up. If/when we get responses from InterOil or other seemingly credible sources to this report, we will publish them.
The problem is that this type of rock produces strong INITIAL flows…that then fade away
The nature of the reservoir rock
The problem with the oil wells around Puri Creek and Seppi Creek was the nature of the reservoir rock. As one of the geologist reports from the time suggested, the limestones comprise the dense, brittle, recrystallised, bathyal, Miocene aged micritic and the underlying recrystallised shelfal Eocene aged Mendi Limestone. These brittle limestones are encased in thick more plastic shales.
The key word here is “micritic.” Wikipedia describes micrite as consisting of calcium crystals so small that they can only be seen clearly with a scanning electron microscope. The porosity – critical for the sustained flow of oil and gas – is low. The second key word – describing both the “underlying” rock is “recrystallised”. What that means is that the limestone has been re-cemented together as limestone is apt-to-do. The import of that will be seen below.
The same geologists report however notes that the the rock is heavily fractured. Interoil also notes fractures in its presentations. The fractures can be seen clearly in the photo of a young woman (actually one of the key early geologist’s wives) on limestone outcropping in Puri Creek.
A drill core sample from Puri Creek shows the nature of the rock (deep inside this hill). Note this drill core was extracted over fifty years ago from the Pur1-1 well.
What happens when you drill is that a lot of highly pressurized gas (and any oil) in the fractures in the rock rushes to the surface. However as there is very low porosity (micrite – remember) the sustainable flow is very low.
As someone noted – these wells go off with a very large, very flammable fart. They last only marginally longer than a fart too.
One counterpoint is that if Interoil were to drill a formation with an extensive and continuously linked crack system then they may have a sustainable well. In the Middle East some good reserves exist in extensively fractured limestone systems. These systems however have not “recrystalised” gluing all the cracks together.
Source: This excerpt is from an investigation into InterOil’s operations in Papua New Guinea provided to Business Insider by its author. Business Insider regards the author and the report as credible but we have not checked any of the facts or assertions therein. The author of this report will benefit financially if InterOil collapses. It is also possible that the author made the whole thing up. If/when we get responses from InterOil or other seemingly credible sources to this report, we will publish them.
Despite all the failure, there IS one semi-success story nearby. And it is possible that InterOil has found another site with the same characteristics
Image: InterOil Investor Presentation
The one offshore success in drilling Papua New Guinea carbonates
Up until Interoil every well drilled in carbonate (that is limestone based) reservoirs onshore in PNG has been an expensive failure. Offshore, however, there has been some success.
In particular, the energy company Talisman found the “Pandora Reef” which contains a lot of gas and apparently flows very well. At various times Talisman has suggested a floating LNG plant to monetize this resource.
The geology of the Pandora find needs explaining. The Pandora Reef is apparently an old buried coral reef – a sort of continuation of the Great Barrier reef. Over time the corals build up and they are filled with “spongy objects”. When drilled they are porous and gas trapped in them flows well, in sharp contrast to the micritic base limestone.
Seismic surveys (which are easier to do on sea than on land) identified several other coral outcrops but the second outcrop drilled flowed at a much lower rate (in some way the rock had been re-cemented together over time as limestone sometimes is). Also the gas was sour with carbon dioxide and some sulphur. Pandora has been an orphan discovery.
That said the geologists working for Interoil (who by repute include the very competent David Holland) developed a theory that the repeating reefs found offshore (and which were porous) were repeated onshore. They were just hard to find because the seismic is so difficult to interpret for onshore PNG.
Source: This excerpt is from an investigation into InterOil’s operations in Papua New Guinea provided to Business Insider by its author. Business Insider regards the author and the report as credible but we have not checked any of the facts or assertions therein. The author of this report will benefit financially if InterOil collapses. It is also possible that the author made the whole thing up. If/when we get responses from InterOil or other seemingly credible sources to this report, we will publish them.
When the initial wells failed, the earlier explorers moved on to nearby territory. But they still failed…
Image: InterOil Investor Presentation
The shift of oil and gas exploration in Papua to sandstone reservoir rock
There was no doubt that there was oil and gas in Papua New Guinea. The frequent seeps and even gas flares in rivers saw to that. There never was any doubt. The problem was that the reservoir rock (micritic and recrystalised carbonates) led to disappointments. The source rock (deep underground) was not a problem. Explorers just had to find better reservoir rock to drill into.
They did – East of the original carbonate finds – in what is now known as the “fold belt”. Oil Search (the core local oil explorer) led the discoveries finding hills with sandstone outcrops in the side and presuming (correctly) that the rocks exposed on the side of the hill (and the shape of the hill) were reflected in the structures inside the hill. Most of the big discoveries were done this way without seismic surveys. By 1997 Oilsearch could give a map of the oil and gas fields of Papua New Guinea. This map is from the 1997 Oil Search annual report (note the need to click for a large map):
The finds were done without seismic precisely because of the extreme difficulty in doing seismic surveys in such broken terrain with these rock structures. Almost all the hydrocarbons have been discovered by looking at the shape of hills. You will note that all of the marked gas, oil and condensate finds are in a straight line – that line being the “Papua New Guinea Fold Belt”. Lurking off this line is a little block marked as APPL201. That stands for “Applied Papua Petroleum License 201”. That block contains the old Puri1 discovery and the abandoned Puri 2 well. The old owners (British Petroleum, Vacuum and Oil Search) had let the area revert to PNG Government ownership because they did not think there was anything worth drilling. New owners applied for the license.
The new owners of Papuan Carbonate leases
Big oil – and Oil Search – over time returned all their interest in the Carbonate fields to the Papuan government. They were interested in the fold-belt – an area with similar source rock (and hence with gas and oil) but with sandstone as reservoir rock. The Fold Belt is a world class natural gas resource.
New owners took hold of the carbonate fields. The deal was that you got access to the field on a promise that you would spend a certain amount doing seismic or drilling. After two years you would have a right to keep the field or surrender it. If you kept it you had to spend considerably more doing test wells and the like. Again after two years you could keep it or surrender it. If you kept it you had to spend much more doing further exploration and development wells. Then you were allowed to keep the well as a producer. The Papuan government would get a partial interest in the field as consideration for granting the license. Essentially they had the exploration and early development costs carried for them.
South of APPL201 the fields became owned by Cheetah Oil and Gas. The nature of Cheetah’s assets are described in a 2005 SEC filing. They included the old Bwata discovery.
Cheetah it seems lives on but the stock price is now 16 cents and the stock trades infrequently.
APPL201 became PPL201. It was owned 55 percent by Bligh Resources (since renamed Horizon Oil and Gas) and 45 percent Auriga Petroleum – an effectively defunct vehicle owned by a Sydney resident geologist who (I think) ran the show.
The owners of PPL201 did some seismic surveys on the hill just east of Puri-1. They could not afford (or did not want to afford) to do the drilling necessary to keep the license for another two years so they hawked the license around the local players. I have the sales documents (which are unsurprisingly highly promotional as to the quality of the resources). I also have all the seismic data.
Because Bligh and Auriga could not find a buyer they surrendered PPL201 back to the Papuan government.
Interoil applied for a license for these areas and they have become the core of Interoil’s drilling program. All the recent drilling has been conducted in the old PPL201 – and in fact they have drilled prospects identified by Auriga and Bligh.
Maps of the old PPL 201
The sales documents mentioned above contain maps of PPL201. I include the a map showing the depth structure of the top of the (Puri) limestone. Sorry about the size – but you will need to click to see in some detail:
The Puri 1 and Puri 2 wells are marked. Prospects as identified in the sales documents are marked as A, B, C, D and E. The various lines on the map in red and black are seismic surveys for which I have the data.
Many of Interoil’s wells are near the prospects as identified by Auriga/Bligh. In particular the area around A and B are the Elk-Antelope structure in which the major Interoil wells are found.
Source: This excerpt is from an investigation into InterOil’s operations in Papua New Guinea provided to Business Insider by its author. Business Insider regards the author and the report as credible but we have not checked any of the facts or assertions therein. The author of this report will benefit financially if InterOil collapses. It is also possible that the author made the whole thing up. If/when we get responses from InterOil or other seemingly credible sources to this report, we will publish them.
And now on to InterOil…
Image: InterOil Investor Presentation
The early Interoil wells
In the late 1990s the plan for monetizing natural gas in PNG was that a pipeline would be built to Australia. You can see that proposed gas pipeline in the above 1997 map from Oil Search’s annual report. That pipeline fell through. Moreover the new finds in PNG were mostly gas (which could not be monetized) rather than oil. It turns out that the oil and condensate are mostly South-East in the fold belt and as you go North-West the wells become drier. Given gas could not be monetized interest in PNG fell to very low levels. [Incidentally Oil Search was a true bargain at this time as its had already identified world class gas resources. The Hides field (marked in the map above) in particular is enormous.]
The lack of interest in PNG meant that rights holders (such as Auriga/Bligh) could not find funding to drill and surrendered their licenses to the PNG government.
Enter Interoil – who staked out a huge area including the old PPL201. This area is laced with hydrocarbons – as the seeps show – and because it demonstrably has similar source rock to the major resources in the fold belt. Big oil had long decided it was not interested in this area.
When Interoil received the permit they had an obligation to drill 8 wells (source: private conversations with Interoil staff). This is a big problem because remote helicopter supplied wells in PNG cost about 70-100 million to drill and Interoil had 8 million in cash resources.
The lack of money determined their first well – which they called Moose 1. InterOil CEO Mulacek it seems has a penchant for naming hydrocarbon prospects after big game animals.
Moose was not a traditional oil well. It was drilled on a small hill near the river. The site was chosen to minimize helicopter transport (and hence to minimize expense). Moreover it was drilled with a mineral exploration rig rather than an oil rig. This would have been a problem had they found a highly pressurized resource because they had no mechanism to stop the well blowing out. However it had several advantages – the most important of which was that it was cheap (and Interoil had a legal requirement to drill wells and little money to do it). The second was that core samples of the rock were bought up in the well. An oil drill tends to turn the rock to mush.
People who were present at the well site say it was pretty exciting. They bought up limestone which was hard and dense like marble – but which cracked apart in your hand. In those cracks was condensate – light hydrocarbons like pentane which are liquid at standard temperature and pressure – but which evaporated away in front of their eyes. Quite reasonably they released this find to the stock market. In the telling though this became the discovery of a major new oil system – a stretch because this “new discovery” was in similar rock to Puri-1 and was close to Puri-1. Moreover it was in an area with known seeps and emanations.
That said the “discovery” allowed Interoil to raise money – something they have done on several occasions – and which has allowed Interoil to drill far more expensive wells – wells with proper-blow-out controls and better prospects.
Source: This excerpt is from an investigation into InterOil’s operations in Papua New Guinea provided to Business Insider by its author. Business Insider regards the author and the report as credible but we have not checked any of the facts or assertions therein. The author of this report will benefit financially if InterOil collapses. It is also possible that the author made the whole thing up. If/when we get responses from InterOil or other seemingly credible sources to this report, we will publish them.
The later InterOil wells
The later Interoil wells
Interoil developed a theory that the reefs identified by energy company Talisman at Pandora (the offshore site) repeated themselves onshore. The idea was that the resources were fractured dinner plates but if they could find a reef they would get some really good gas or even oil.
They drilled several wells into the carbonates – but in all cases until the most recent they found themselves drilling the same fractured micritic limestone that they had always drilled. This produced sometimes very spectacular flows and only one substantially dry well (Elk 2). Elk 2 and Puri 2 were the only substantially dry wells ever drilled in this part of PNG.
These wells produced massive skepticism amongst old hands in Papua New Guinea. They look like the Puri and Bwata discoveries. They will flow really fast at first – as the gas rushes out of the cracked limestone – but will – in the opinion of the skeptics – cease to flow quite rapidly. Its is the micritic limestone again – with the hydrocarbons hidden only in the fractures. It is not hard to find Interoil skeptics if you asked around people familiar with Papua New Guinea.
That said a really fast flowing discovery is absolutely fabulous for a stock promotion. You invite stock analysts (flown in by helicopter) or politicians (especially the local Prime Minister Mr Somare) to the well and you light a really big flare. Its convincing for the stock analyst – and never need understand the rather difficult nature of the reservoir rock.
Visiting the well site – as Morgan Stanley analyst Evan Calio did – proves nothing. If you were a stock promoter it would be a dream. You could obtain acreage for next-to-nothing because majors are not interested in drilling this rock. You drill it. You light a fire and convince Wall Street. You sell your stock for a big profit (presumably using brokers who don’t ask any questions).
When you are also associated with Carlo Civelli – someone who is being accused in the Canadian press of doing precisely that on Arakis and other stocks – then short-sellers ask questions.
The critics argue that Interoil could silence the critics by doing a sustained production test. When BP did a sustained production test on Puri-1 they fell short. Without a sustained production test it simply makes no sense to promote these wells as future supply for an LNG (Liquid Natural Gas) plant. Nobody builds an LNG plant (at a cost of say $8-15 billion) without doing a sustained production test on this sort of limestone reservoir. It would be more than embarrassing to drill a multi-billion dollar LNG plant and then find the wells behave like Puri 1.
By contrast, when you ask Interoil staff in the field – they could not imagine this is a fraud. They are excited to be finding hydrocarbons – and they believe that somewhere out there is a large liquids field. They even believe that one day they will find a series of elusive reefs (as per Pandora/Talisman) or the elusive sandstone oil reservoir (as per Oil Search).
Some very experienced PNG hands say it is ludicrous to be talking about building an LNG plant off these wells. These same people however believe that the acreage is good and one day enough gas (and perhaps oil) will be found to back Interoil’s ambitions. [It is – it seems possible – to disbelieve things that CEO Mulacek says and still believe in Interoil. Some Papua New Guinea old-hands fall into that camp.]
Also the bulls in the field note that Elk 1 probably contained a (very small) amount of oil (which was exciting). Oil was described as “recovered” rather than flowing. But after oil shows at Moose 1 and Moose 2 this was encouraging.
Interoil published this photo of the flare at the Elk 1.
The photo here contained a small amount of black smoke on the flare. No other Interoil well has shown black smoke – indicating this well had more oil than the others.
Still the elusive reef well eluded Interoil until recently. The seismic surveys are hard to do on land – and – unlike Talisman they could not just spot the reef and go drill it. Finding a reef was going to be tricky.
Source: This excerpt is from an investigation into InterOil’s operations in Papua New Guinea provided to Business Insider by its author. Business Insider regards the author and the report as credible but we have not checked any of the facts or assertions therein. The author of this report will benefit financially if InterOil collapses. It is also possible that the author made the whole thing up. If/when we get responses from InterOil or other seemingly credible sources to this report, we will publish them.
Finally — The Big Discovery: Antelope
Image: InterOil Investor Presentation
The Antelope Reef – the (claimed) greatest gas discovery in history
Interoil claim to have found the elusive reef. Interoil’s last well (Antelope 1) is promoted as a real rip-snorter. The company claims that the reef is dolomite rock and 746 feet (227 metres) wide and very porous. They report a flow rate of 382 million cubic feet of gas per day and 5,000 barrels of condensate per day. I worked this out at an equivalent of 67,500 barrels of oil equivalent per day. This is a simply monstrous flow. The second well drilled into the Antelope structure (Antelope 2) is claimed to have even larger flows.
Here are photos (courtesy the always promotional Interoil) of the Prime Minister (Michael Somare) at their “world record” hydrocarbon find:
Indeed the specifications as promoted by Interoil are as follows:
Record flows of 382 MMcfd and 5,000 BCPD and Calculated Absolute Open Flow of over 17 BCF per day
* From 5,840 ft MD (1,780 m) to setting of the 7” casing, all drilling/testing operations conducted with no-returns to surface indicating significant permeability and porosity
* Over 500,000 Bbls of drilling fluid (mostly freshwater) lost to the formation
* Dolomite Zone: Net reservoir 746 ft (227 m) Av. Porosity 13% up to 30%
* Limestone Zone: Net reservoir 1,345 ft (410 m) Av. Porosity 7%
* Upper Transition Zone: Net reservoir 108 ft (33 m) Av. Porosity 5%
* Lower Transition Zone: Net reservoir 217 ft (66 m) Av. Porosity 4%
* Excellent hydrocarbon saturation characteristics confirmed by wireline logs and capillary height data
There are a couple of issues with this claim. There is no way that the well was actually tested at that rate. It is the equivalent of flaring oil at a barrel every 1.3 seconds. Nobody I know who has ever worked on an oil field has ever seen a flare remotely like that. It is of course a world record. But the point is that the photos of the flare are very large – but they are not that large. The people I have spoken to (mostly field engineers) tell you the safety officer (justifiably) turns it off at about a tenth that level.
That said – it may have been tested at that rate in some theoretical sense – so I am prepared – for lack of other evidence – to accept the flow could be extremely large (and indeed at world records).
The second problem is the statement that the upper-reef section (the core part of the find) is made of dolomite. Dolomite is limestone which magnesium rich waters have flowed through and replaced some of the calcium with magnesium – producing calcium magnesium carbonates. They are hard and porous and make an excellent reservoir rock. However there is no other dolomite around the area in PNG. The Pandora reef (which is the model for the Puri Reef discovery) is not dolomite – it just spongy, porous limestone.
Moreover I have talked to geologists who have actually wandered around the jungle around this well area and they have never found any dolomite. One explanation I have heard is that InterOil geologist David Holland might have said to the CEO that the structure was “dolomite like” (which Pandora is) and this got translated in the press releases to the structure being dolomite. That said – it hardly matters whether it is dolomite or not – it is clearly very porous. The company claims that 500 thousand barrels of drilling fluid was lost to the formation. That does not happen unless there are some significant gaps for the fluid to flow into.
(I just want to make it clear that I have not spoken to David Holland. However people who are (a) familiar with the PNG oil scene and (b) skeptical of Interoil have the highest regard for David Holland.)
On these numbers it is pretty clear that the reef at the top of the Antelope well is special. We have no idea independent of the company how big it is – but David Holland appears to have found his Pandora. [The company has released (huge) estimates backed by GLJ Consultants – a small Canadian firm. This is reassuring but the consultants are not the “brand-name” consultants required to get bankers to lend you the billions of dollars required required to fund an LNG project.]
Against this however it is very easy to overstate the reserve here. The lower part of this well appears to be the usual micritic (Puri) limestone. Indeed one petroleum engineer I showed it to noted immediately that the flows within the lower section of the well must be terrible. The company talks about transition zones (totaling over 300 feet). This reservoir engineer point blank said that if these reserves were connected and flowed well there would be a single gas-water contact – not a large transition zone. The lack of connectedness of reservoir in this underlying rock I think is explained by the geologist’s observation above – that the underlying rock has been “recrystalised”. This recementing of the rock has stuffed up any interconnectedness (and hence possibility of sustained flow) for the lower part of the reservoir.
This suggests that the bottom part of the well is as irrelevant as an earlier weak well, Puri 1. It will flow as the gas comes out of the cracks in the rock – and then it will stop.
Still there could be considerable resource in the reef. Indeed the finding of a reef has palpably reduced the skepticism towards Interoil of a few PNG old-hands I have talked to. Some of these old-hands think that Antelope is valuable – but that the Interoil resource estimates (including the micritic base limestone) are nonsense.
Source: This excerpt is from an investigation into InterOil’s operations in Papua New Guinea provided to Business Insider by its author. Business Insider regards the author and the report as credible but we have not checked any of the facts or assertions therein. The author of this report will benefit financially if InterOil collapses. It is also possible that the author made the whole thing up. If/when we get responses from InterOil or other seemingly credible sources to this report, we will publish them.
So maybe InterOil has actually found something. But is there enough there to build a Liquid Natural Gas (LNG) plant?
Image: InterOil Investor Presentation
Does Antelope contain enough gas for an LNG plant?
According to Interoil yes. They have had a small Canadian firm vouch for these numbers. However their latest testing well failed – and seismic surveys (to delineate the size of the field) are notoriously difficult in this terrain.
The old PNG hands I have talked to are skeptical – with their skepticism being driven by the difficult nature of the reservoir rock and any seismic data. We also do not know what (if any) reserves we should count from the massive amount of fractured micritic limestone underneath the reef. Some people I have spoken to who were around when the Pandora offshore field was discovered thought it was 0.5-1 trillion cubic feet of gas (nowhere near enough for an LNG plant). However, Talisman now talks about it as possible 1.5TCF. The Antelope reef is likely somewhere in this range (though the micritic limestone might contain more – possibly much more – but only depending on the connectedness of the fracture system).
But even the field bulls on Interoil – people who believed in the acreage (and believed in David Holland the geologist) thought that it was way-premature to be talking about an LNG plant. That of course has not stopped Interoil from having that discussion with the market. Certainly, without flow testing, it is vanishingly unlikely that any partner would approve the expenditure on an LNG plant.
Still there are potential partners interested. GAIL – the Indian national gas distribution company – has indicated that it is interested in an agreement. GAIL has tended to work with Total in the past.
Source: This excerpt is from an investigation into InterOil’s operations in Papua New Guinea provided to Business Insider by its author. Business Insider regards the author and the report as credible but we have not checked any of the facts or assertions therein. The author of this report will benefit financially if InterOil collapses. It is also possible that the author made the whole thing up. If/when we get responses from InterOil or other seemingly credible sources to this report, we will publish them.
So that’s the history. Now you have some basis for evaluating InterOil’s claims. How will it all work out? Here are some scenarios. And stay tuned for the Antelope tests…
Image: InterOil Investor Presentation
What is the history? Will Interoil repeat it?
I write all of this out so you can see the historical context for the Interoil claimed finds. Interoil and Morgan Stanley (particularly Morgan Stanley) present this as a frontier basin. But there is a history of big-oil exploring and then abandoning the region.
I started this with the cliché that those that do not study history will be doomed to repeat it. Unfortunately the more I look the less certain of which version of history we are doomed to repeat. There are a few:
This could be Arakis mark 2 – a company with real and prospective acreage – and geologists in the field who believe in that acreage. But a company that nonetheless is over-promoted to the stock market and which collapses when that over-promotion (and possibly insider selling) is exposed. The evidence for this is strong – with doubts about the size of the Antelope field, the nature of the reservoir, the condensate claims, the liquid stripping plants all springing to mind.
This could be Talisman/Pandora mark 2 – where one or more reefs are eventually discovered some of which may contain sour gas.
This could be Oil Search mark 2 – where some oil and a huge amount of natural gas are found – and those finds are sufficient to justify a huge LNG operation. Those could be – as some of my field bulls suggest – in the Pale or Subu sandstones.
Or it could be an altogether different version of history – one I have not explored because so many of the key people were hard to find and to talk to. Some of the key people who know about Kundu Petroleum were dead – and Kundu was only 20 years ago. Finding out stuff about Puri-1 is terribly difficult.
I am hoping to find more PNG old hands – and I hope they can help me out.
(To contact the author of this report, please send an email to [email protected]).
Source: This excerpt is from an investigation into InterOil’s operations in Papua New Guinea provided to Business Insider by its author. Business Insider regards the author and the report as credible but we have not checked any of the facts or assertions therein. The author of this report will benefit financially if InterOil collapses. It is also possible that the author made the whole thing up. If/when we get responses from InterOil or other seemingly credible sources to this report, we will publish them.
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