PNG LNG on Track for First Sales in 2014 (Papua New Guinea)

Oil Search today announced its activities report for the quarter ended 31 December 2011.

Highlights

• In early December, the operator of the PNG LNG Project, Esso Highlands Limited, a subsidiary of Exxon Mobil Corporation, confirmed that good progress is being made on all aspects of the Project and that it remains on track to achieve first LNG sales in 2014. An increase to the budget of US$700 million was announced, taking the total Project cost to US$15.7 billion. The increase primarily reflects the impact of foreign exchange rate fluctuations, with other elements of the budget largely unchanged.

• During the quarter, construction advanced at the PNG LNG plant site, along the pipeline route and in the Highlands region. Activities included the commencement of the offshore pipelay, continued construction of the tanks and jetty at the LNG plant site and good progress on earthworks for both the upstream facilities and the Komo airfield. In addition, mobilisation of the first of two drilling rigs for the Hides development drilling programme continued.

• Oil Search’s oil and gas production for the fourth quarter of 2011 was 1.64 million barrels of oil equivalent (mmboe), 10% higher than in the third quarter. The increase reflected a full quarter’s production, with the third quarter impacted by a two week planned facilities shutdown. The strong fourth quarter took total production for the 2011 full year to 6.69 mmboe, at the upper end of the Company’s guidance range of 6.2 – 6.7 mmboe.

• Fourth quarter oil production was 1.40 million barrels (mmbbls) while 1.59 mmbbls of oil were sold during the period. As a result, crude inventory levels declined, from 0.41 mmbbls at the end of September to 0.20 mmbbls at the end of December. The average oil price realised for the quarter was US$113.54 per barrel, 3.4% lower than in the third quarter of 2011. This took the average realised oil price for the 2011 full year to US$116.09 per barrel, representing a 44.8% increase on the average price realised in 2010. The Company remained unhedged during the period.

• Total operating revenue in the fourth quarter was US$201.5 million, 25.8% higher than third quarter revenue of US$160.2 million. Revenues for the full year were US$732.9 million, 25.6% above the 2010 full year, reflecting the strong oil price which more than offset 10.6% lower sales volumes.

• During the quarter, Hedinia 10 ST3, which discovered oil in a forelimb exploration prospect, was successfully tied-in to existing PDL 2 surface facilities and brought into production. In addition, Agogo 6, an Agogo forelimb appraisal well, successfully encountered hydrocarbons in the target Toro sandstones. Both wells are expected to contribute to production in 2012 and beyond.

• During the quarter, construction of the P’nyang South well site, located in PRL 3, was completed. The well is expected to commence drilling shortly. P’nyang South will appraise the P’nyang gas field, which Oil Search believes could be a key resource for LNG expansion activities.

• The Company is set to embark on the largest drilling programme in its long history, with gas appraisal and development wells at Hides and P’nyang, gas exploration at Trapia and oil appraisal and exploration in the Kutubu fields and in the Taza PSC in Kurdistan.

• At the end of December 2011, Oil Search held US$1.04 billion in cash, excluding joint venture balances, compared to US$1.10 billion at the end of September. US$1,747.6 million had been drawn down from the PNG LNG project finance facility by the end of the period, while Oil Search‘s revolving oil facility, which had a commitment limit of US$246.5 million at the end of December, remained undrawn.

• During the quarter, US$35.3 million was spent on exploration and evaluation activities, US$382.0 million on the PNG LNG Project and US$30.5 million on oil field development work.

Commenting on the quarter, Managing Director, Peter Botten, said:

PNG LNG Project

“Good progress was achieved on all Project elements during the fourth quarter. Major earthworks are well advanced while facilities and associated support construction is also progressing well. Project milestones achieved during the period included the commencement of the offshore pipelay and the arrival of the first foundation piles at the Hides Gas Conditioning Plant site.

We are pleased that the Operator has recently confirmed the Project is on track for first gas in 2014. In addition, apart from a US$0.7 billion foreign exchange impact, the Operator has confirmed that the budget is largely unchanged, despite the significant cost pressures facing the LNG industry in general. Oil Search is amply funded to meet its modest equity share of the foreign exchange related increase in the budget.

The fourth quarter saw a period of unprecedented constitutional and political uncertainty in PNG. It is a testament to the strong Government support for PNG LNG that this did not affect either the Project or Oil Search’s oil and gas activities.

The Project continues to maximise local involvement in project activities. It is particularly encouraging to see a new generation of talented PNG high school graduates completing the first phase of their operations and maintenance training programmes. They will now progress to a one year advanced skills training programme overseas and a second intake of trainees will be developed in 2012.

Oil Search also made progress on a range of construction activities for the Associated Gas and PL 2 Life Extension Projects. A milestone was reached on the Associated Gas Project, with all major process equipment, including gas dehydration and commissioning gas units, now in PNG. The construction of a new control room building at the Central Processing Facility was completed and installation of the control equipment is underway. Installation of the new CALM buoy and subsea pipeline for the PL 2 Life Extension Project was also completed and will be commissioned in early 2012.

Preparations are ongoing for the commencement of the drilling phase of the Project, with progressive mobilisation of the two drill rigs to PNG and the Highlands. The Operator continues to optimise logistics to meet both Project construction and drilling timing requirements. Drilling is presently anticipated to commence in mid-2012.”

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LNG World News Staff, January 24, 2012