Papua New Guinea: Oil Search Reports Results for the Year Ended 31 December 2010

Oil Search today announced financial results for the year ended 31 December 2010.

Commenting on the 2010 results, Mr. Peter Botten, Oil Search’s Managing Director, said the following:

2010 Full year results

“Oil Search’s 2010 full year net profit including significant items was US$185.6 million, 39% higher than in 2009. The profit increase was driven by higher realised oil prices, reflecting both an increase in global oil prices and a move to dated Brent as our primary marker crude, and a US$49.6 million once-off restatement of deferred tax balances relating to the PNG LNG Project. This more than offset the 7% decline in oil sales and impairment charges of US$8.1 million after tax.

Excluding significant items, net profit after tax rose 45% from US$99.6 million to US$144.1 million.

Total production for 2010 was 6% lower than in 2009. Efforts to optimise individual well performances combined with strong contributions from recent development wells helped to mitigate natural field decline. In addition, unplanned plant and well downtime was significantly reduced following a renewed focus on improving maintenance processes.

Operating costs rose 9% over 2009 levels, due to the inflationary impact the PNG LNG Project has had on items such as labour and contractor costs as well as the impact of higher oil prices on fuel costs and royalties. In addition, the strengthening of the A$ relative to the US$ during the year put pressure on the Company’s A$ denominated expenditures. These impacts were partly offset by the opportunity to share some field infrastructure operating costs with the PNG LNG Project.

Oil Search spent US$1.14 billion on the PNG LNG Project in 2010, which was in line with the February 2010 guidance of US$1 – 1.3 billion. The Company also spent US$176.0 million on exploration and new venture activities, mainly on the Wasuma, Korka and Mananda 5 exploration wells. In line with the successful efforts accounting policy, all costs associated with unsuccessful drilling, seismic work and other evaluation activities were expensed, resulting in a pre-tax charge of US$131.2 million (US$75.7 million in 2009).

Oil Search has conducted a review of its deferred tax balances in light of the start of full execution of the PNG LNG Project and the finalisation of its long term business plan following the 2010 strategic review. The Kutubu, Moran and Gobe Main fields will all contribute to the PNG LNG Project at some stage in the future and when gas production commences from each field, the fields will move from the current tax rate of 50% applicable to oil operations into the gas tax regime of 30%. This has resulted in a net credit to income tax of US$49.6 million, reducing the effective tax rate from 44% in 2009 to 33% for the 2010 financial year. As this is a non-cash accounting adjustment, it will not impact actual tax paid in the near term and the effective tax rate is expected to revert back to around the 50% oil field tax rate in 2011.

The Board has approved the payment of a final dividend of two US cents per share, the same as the 2009 final dividend. The shares will trade ex-dividend as from 10 March 2011, the record date of the dividend is 16 March 2011 and payments will be made to shareholders on 8 April 2011. A fully underwritten dividend reinvestment plan will fund this payment.”

Commencement of full PNG LNG Project execution

“The PNG LNG Project commenced full execution in March 2010 after a number of milestones had been reached. These included the finalisation of financing arrangements with lenders and the signing of the final sale and purchase agreement. Project activities ramped up significantly during the year. By the end of 2010, some 5,000 people were engaged on the Project, of which approximately 80% are PNG nationals.

Project activities in 2010 were focused on the following areas:

– Mobilisation of people and equipment to PNG by the Operator, Esso Highlands Limited (a subsidiary of Exxon Mobil Corporation) and the major engineering, procurement and construction contractors.

– Procurement of long lead equipment and materials.

– Construction of training facilities in Port Moresby and in the Highlands

– Continued early construction activities both in the PNG Highlands (including earthworks, resettlement activities, road and bridge upgrades) and at the PNG plant site near Port Moresby (accommodation camp, road bypass).

– The delivery of line pipe to Kopi wharf on the south coast.

– Commencement of Associated Gas (AG) construction in the oil fields and the PL 2 Life Extension Project.

By the end of the year, the first in a four year construction timetable, the main camp facilities were operational and contractors were mobilising ready to progressively commence the main construction activities during 2011. In addition, clearing of the onshore pipeline route had commenced south of Kopi, in preparation for pipeline laying.

As anticipated, there were some challenges over the year. These included initial infrastructure capacity constraints, since largely resolved, and ensuring the effective and efficient mobilisation of Project labour into PNG. In addition, with a policy of maximising employment and service contracts for PNG nationals, coordinating the efficient use of landowner companies to deliver maximum local content has been challenging, for both the PNG Government and the Project. While the Project has full support from the local community, Project activities have had some local disruptions, most recently at the Hides-4 site, primarily due to landowner concerns about business development opportunities and seed capital, provided by the PNG Government for new business start ups. The Project Operator is proactively addressing stakeholder concerns and seeking opportunities for win:win outcomes. Oil Search believes that the recent appointment of Deputy Prime Minister and Minister for Works, Hon. Samuel Abal, who is Chairman of the National Planning Committee, to be the Government’s focal point for settling all outstanding issues relating to the PNG LNG Gas Project is a major step forward to resolving landowner related issues and indicative of the importance the Government places on the Project.

The Project Operator has recently reiterated that first LNG sales remain on target to commence in 2014.”

LNG expansion – reaffirmed as a key focus area

“The Strategic Review undertaken during 2010 reaffirmed Oil Search’s view that significant value can be generated for shareholders by expanding the Company’s LNG business. During 2010, Oil Search commenced the implementation of a two pronged strategy, which includes promoting a resource maturation programme to underpin the potential expansion of the PNG LNG Project as well as pursuing Gulf of Papua opportunities. Work continued in conjunction with our joint venture partners on designing an integrated exploration and appraisal programme in the Highlands region, focused on proving up sufficient reserves to underpin a third LNG train. A number of licence acquisitions and farm-ins into acreage offshore in the Gulf region, where Oil Search believes the highest potential for large gas accumulations outside the Highlands lies, were completed during the year.”

Safety record

“Oil Search’s Total Recordable Injury Frequency Rate in 2010 was 1.96 per million hours worked, compared with 1.16 per million hours worked in 2009. The increase in injuries relative to 2009 was disappointing and Oil Search is working closely with its contractors and staff to reinforce safety messages and its commitment to delivering a safe working environment. While our 2010 safety performance remains strong relative to the historical results of our Australian peers, we continue to strive for improved outcomes.”

Shareholder returns

“Oil Search delivered an annualised Total Shareholder Return (TSR) in 2010 of 15.5%, while over a five year period the Company has generated an annualised return of 15.2%, making Oil Search the sixth ranked TSR performer out of the ASX 100 over this period (based on the ASX 100 composition at 01/01/2006).”

Reserves stable, resources increase

“As at 31 December 2010, Oil Search had 1P reserves of 337 million barrels of oil equivalent (mmboe) and 2P reserves of 559 mmboe. Of these reserves, 301mmboe of 1P and 505 mmboe of 2P were associated with the Company’s share of the PNG LNG Project.

No external audit was completed in 2010 as oil field performance has generally been consistent with predictions and no changes have been made to the PNG LNG Project gas reserve estimates. As a result, 1P and 2P reserves reported for 2010 are based on 2009 reserves adjusted for 2010 production of 7.7 mmboe.

At the end of December 2010, the Company also had 318 mmboe of contingent resources, comprising gas and associated liquids. This was 37 mmboe higher than at the end of 2009, with the increase due to the discovery of oil at Mananda 5 in PPL 219 in PNG and Al Meashar-1 in Block 7 in Yemen and the acquisitions of an additional 6.4% in PRL 1 (containing the Pandora field) and 2.5% in PRL 9 (Barikewa field). The Company’s total 2010 year end 2P reserves plus 2C resources were 877 mmboe, up from 838 mmboe in 2009.”

Successful oil exploration

“During 2010, two oil discoveries were made. Early in the year, the Al Meashar-1 well discovered oil in Block 7 in Yemen. While an appraisal well on the discovery drilled towards the end of the year confirmed the existence of hydrocarbons in the fractured basement, it failed to produce oil at commercial rates. The well has been completed as a potential future producer while further 2D seismic is acquired over the prospect and studies are undertaken to identify a productive fracture system.

In PNG, the Mananda 5 well in PPL 219, located approximately 18 kilometres north west of the SE Mananda oil field, discovered oil and gas in the primary Toro objective.

Preparations are currently underway to flow test both the Toro and Digimu sandstone intervals, to evaluate the potential commerciality of the discovery.”

Strategic Review outcomes

“Oil Search has recently concluded a major Strategic Review. This Review has highlighted that the Company is capable of delivering top quartile returns for the next five years based on its existing asset base and the skills that exist in the management team and workforce.

The key principles that will guide the Company’s activities over the next five years are as follows:

– Total Shareholder Return will remain Oil Search’s key performance measure.

– The Company will remain an oil and gas growth company, balancing dividend payouts with reinvestment for growth.

– While the execution of its PNG gas growth strategy development will result in a gas dominant product portfolio, Oil Search will strive to maintain a meaningful position in oil.

– The strategic plan will see an increasing focus on PNG, which will require continued proactive management of the PNG in-country environment

– International growth opportunities will continue to be actively evaluated, with execution driven by the ability to create value and to achieve top quartile TSR growth rates.

– A new sustainability department will be established to coordinate and proactively manage the Company’s sustainability issues.

– Oil Search’s operatorship capability and capacity will be maintained, enabling Oil Search to manage PNG in-country risks while also preserving its core corporate capacity and capability to extract value from current operations and future international growth opportunities.

Specific strategies that will be pursued to achieve superior value growth performance include:

– Optimising the value of the oil and gas operations through the pursuit of near field production opportunities, rigorous cost control and new developments while building long term operating capacity.

– Maximising the value from the PNG LNG Project (T1/2), including active management of in-country benefits distribution.

– Development of LNG expansion opportunities by promoting an early decision on a third train (T3) based on existing PNG LNG Project fields and nearby structures and accumulating gas resources outside existing PNG LNG Project fields, to support a standalone LNG project.

– Ensuring Oil Search’s sustainability, with an enhanced focus on managing operating risks, promoting transparency and improved external reporting

– Actively evaluating international growth opportunities, recognising any transaction must compete for funds with PNG expansion opportunities.

– Optimising the Company’s financial and capital structure given the long term capital requirements.

– Aligning the organisation to deliver this strategic plan.”

On the outlook for 2011, Mr Botten said:

PNG LNG Project

“During 2011, the following key activities are expected to take place on the PNG LNG Project:

– LNG Plant – procurement, earthworks, foundations and commencement of structural steelwork, commencement of pipe racks and jetty works and tank foundations.

– Offshore Pipeline – continued procurement and mobilisation of line pipe, preparations for and the commencement of, offshore pipe lay.

– Onshore Pipeline – continued procurement, coating and mobilisation of line pipe, route clearance and commencement of pipe lay.

– Associated Gas and PL 2 Life Extension – Mobilisation of equipment, completion of control room construction, commencement of construction activities at Kutubu CPF and Gobe GPF. Mobilisation of barge for offshore work, preparatory platform work, deck modifications and crane installation.

– Hides Gas Conditioning Plant and Komo Airfield – continued earthworks, foundations and commencement of construction activity.”

Production outlook

“As highlighted in the fourth quarter report, we anticipate that 2011 full year production will be in the range 6.2 – 6.7 mmboe, compared with 2010 production of 7.66 mmboe. The decline reflects a planned shut-in of facilities in the second and fourth quarters to enable work related to the PNG LNG Project to take place, with underlying field decline being largely offset by work programme activities through 2011. As previously indicated, based on the Company’s currently planned development activities, we expect Oil Search’s oil and gas production from now through to first LNG in 2014 to remain relatively flat, despite the maturity of the oil fields.

Development activities planned for 2011 include:

– Drilling of a gas injector well at the Usano field and two development wells, one each at the Kutubu and the Moran fields.

– Testing of the deeper intervals in the ADT 2 ST3 well, which discovered oil in the Agogo forelimb in late 2009/early 2010.

– A workover campaign in Kutubu and Gobe.”

Exploration outlook

“The focus of Oil Search’s exploration activities over the next few years will be to prove up sufficient gas resources in PNG to underpin the development of at least one further LNG train. Subject to the positive conclusion of technical evaluation, the Huria exploration well is expected to commence drilling in late 2011, while the appraisal of the Hides field is targeted to commence at the same time. Planning is underway to drill the P’nyang well in early 2012 and a multi-well offshore PNG programme.

The key aim in the Middle East and North Africa (MENA) is to establish whether material hydrocarbons exist in any of the Company’s remaining licences interests in the region and to maximise the value of the portfolio of assets.”

Summary

“With the PNG LNG Project now in the second year of a four year construction programme, we are confident that the Project Operator, ExxonMobil, will continue to execute the Project effectively and efficiently, with continued support from Oil Search on in-country issues. Following the conclusion of the 2010 Strategic Review, Oil Search’s focus in 2011 will be on commencing the implementation of the work programmes required to deliver the value-creating initiatives identified in the Review. With a healthy balance sheet, an excellent asset base and a committed management team and staff, we are well placed to pursue and deliver further significant value growth to shareholders.”

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Source: Oil Search, February 22, 2011;