Oil Search and Santos tick off the final hurdle to PNG LNG success

The five-year journey taken by energy seekers Oil Search (ASX: OSH) and Santos (ASX: STO) on their PNG LNG project is nearing an end. The joint venture started in 2009 and is now more than 90% complete and on schedule for first production in the second half of 2014.

The final hurdle in the project has now been completed with the announcement that an additional US$1.5 billion debt facility has been acquired by the joint venture to help fund a previously announced project cost overrun.

The initial budget for PNG LNG was US$15.7 billion, but this was revised in November 2012 upwards to US$19 billion – a 21% jump. There were various causes of the increase, but the single largest contributor was the negative impact of foreign exchange rates and the deprecation of the US dollar over the project period. According to Oil Search this added US$2.1 billion to the project costs since 2009.

Work stoppages and land access issues in Papa New Guinea contributed another US$1.2 billion in costs, while historically high rainfall and “adverse logistics” are estimated to have added US$0.7 billion.

Given how close the project is to completion and the significant cash flows the project will soon be generating, there were no problems arranging the additional debt facility and the project is not expected to require any more funding. This puts the three companies involved on a sprint to the finish until the gas starts flowing next year.

The project is tapping into over 9 trillion cubic feet (tcf) of gas and 200 million barrels of liquids, which are expected to be produced over the project’s 30-year life. The gas will be extracted from the PNG Highlands and then transported by pipeline to an LNG plant located northwest of Port Moresby.

Santos has already been making plans to further capitalise on its involvement in the project announcing participation in three further prospective exploration permits in the country’s Western Province.

Foolish takeaway

Overcoming this final hurdle puts a big payday from first production squarely in the sights of Santos and Oil Search investors. The optimism has been a driver behind the 36% increase in Santos’ share price this year, compared to the 11% increase in the S&P/ASX 200 Index (Index: ^AXJO) (ASX: XJO).

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Motley Fool contributor Regan Pearson does not own shares in any company mentioned.

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