Interoil's Gas Well Blasts Record

InterOil Corp.’s Antelope-2 vertical natural gas well in Papua New Guinea’s remote Gulf Province bounded to a world record on December 1, testing at a daily rate of 705 million cubic feet of gas and 11,200 barrels of condensate. The well obliterated the previous record for a vertical gas well, also set by InterOil with its Antelope-1. That well tested at 382 million cubic feet of gas and 5,000 barrels of condensate per day, earning recognition from Guinness World Records.

But this latest headline-grabbing test may not tell the whole story of the play’s potential. InterOil, a public independent based in The Woodlands, Texas, and Cairns, Australia, plans to drill the well 1,100 feet deeper to test potential for an oil leg in a deeper formation. The company may also drill its first horizontal leg from the Antelope-2 vertical hole. InterOil is developing the large Antelope structure, which also contains reef facies.

Water Jets protect InterOil Corp.'s rig from the flare during testing of the record-breaking Antelope-2 in Papua New Guinea.

InterOil’s chairman and chief executive officer, Phil Mulacek, announced the world-record results in the company cafeteria on site in Papua New Guinea in steep, ridged terrain covered by jungle—except for the location cleared for well and camp operations. Like most of the executives and crew on hand, his shirt was wringing wet from the base temperature of 89 degrees F, and from the huge gas flare kicking the temperature up to 120 degrees.

Describing the well’s test results, Mulacek said, “That’s 100,000 barrels of oil equivalent. This demonstrates the size of this reservoir is world class.” At full production, he added, this single well could supply two liquefied natural gas (LNG) trains.

At a depth of some 1,224 feet, the Antelope-2 has a thinner net pay column than the Antelope-1 at 2,400 feet, but porosity at the latest well is 60% higher, Mulacek said. Overall porosity at Antelope-1 was about 14%.

As production tests from the company’s wells in the Gulf Province increased, so did the challenges. By the time InterOil drilled the Antelope wells, it had to import chokes from Saudi Arabia. It tested the Antelope-1 on a 3.5-inch choke and went up to 43?8 inches for the Antelope-2.

Concurrently, the company has throttled back the time required to drill a well in this remote location. Including preparation, the time has decreased from nine months to an estimated 90 days, according to Wayne Andrews, vice president of capital markets.

InterOil increased the blowout-preventer capacity to 5,000 pounds per square inch (psi) to make sure it could handle downhole pressures that, so far, have reached 3,800 psi.

The two Antelope wells support and enhance earlier successes in the company’s Elk wells drilled on the same structure, but across a fault. The Elk-1 tested in 2006 for 102 million cubic feet of gas and 510 barrels of condensate a day, while the Elk-4 followed up in 2008 with a rate of 105 million cubic feet of gas and 1,880 barrels of condensate a day.

InterOil's Elk and Antelope wells are in only a small section of the company's concession of 4.6 million acres in southeastern Papua New Guinea.

The distance between the Elk-2 at the north end of the structure and the Antelope-2 at the south end is 7.7 miles. Antelope-2, which also is a delineation well on the structure, lies 2.3 miles south of Antelope-1.

The latest third-party estimate of recoverable gas from the Elk wells reached 6.1 trillion cubic feet. The company hasn’t yet obtained an independent engineering report including Antelope wells.

The wells are in only a small part of the company’s concession of 4.6 million acres (4 million acres operated) in southeastern Papua New Guinea, but they lay the foundation for InterOil’s future strategy and form a logical expansion for operations already in progress. Overall, the company holds 80% of the country’s Eastern Papuan Basin. It also controls an offshore tract for potential future development.

InterOil entered Papua New Guinea in 1999, when no other companies were drilling the Eastern Papuan Basin. Operators had found gas in the basin in the 1950s and 1960s, but, without ready markets, drilling faded. Except for the InterOil wells, only two wells had been drilled in the basin since 1970. During the same period, 39 wells were drilled in the rest of the country.

InterOil has built a vertical operation during its time in Papua New Guinea. It built the nation’s only refinery and set up service stations and a delivery system, with the government’s blessing.

Gaylen Byker, a director of InterOil, obtained the first direct loan for the company from the Overseas Private Investment Corp. (OPIC), a government group that helps small businesses direct private capital from the U.S. to create projects that help in the economic and social development of less-developed countries. Until that time, OPIC had only provided loan insurance.

InterOil has tallied a series of firsts for the country: It was the first to run Falcon gravity and magnetic surveys and the first to use a Chinese-built drilling rig that could be moved by helicopter and had the capacity to drill horizontal wells. It was the first to use downhole-deployment valves so it could use managed-pressure drilling in the producing carbonate section that ran to some 2,400 net feet of pay in the Antelope-1.

The dolomite was so permeable, the company lost fluids to the formation while drilling. Managed-pressure drilling helped solve the problem. It even used two downhole-deployment valves on one well.

It also was the first to take sidewall cores under pressure.

With its expansion into the production side of the business with the Elk and Antelope wells, “We’re just getting started,” said Andrews.

Seeking partners

As a next step, InterOil needs to raise money for infrastructure and additional drilling, with a view toward building an LNG plant to monetize all this gas.

The well sites lie some 40 miles inland and about three miles from the navigable Purari River. The company can bring in supplies and carry out gas liquids by barge, but the massive gas supplies will have to wait on a pipeline to be built down the river and onward to the coast, connecting with a proposed LNG plant on InterOil’s refinery site west of Port Moresby.

In early December, the government approved the company’s plans for the plant.

In the near future, the company wants to build a stripping plant on the Purari River, pipe gas to the plant, strip out the liquids and return the gas to maintain downhole pressure. That operation would require a major financial investment for compression.

InterOil has committed to EDG Consulting Engineers for a feasibility study on a processing plant for Elk-Antelope Field. The goal is to produce 400 million cubic feet of gas a day to yield 9,000 barrels of liquids a day, or 22.4 barrels of condensate per thousand cubic feet of natural gas.

If operations go as planned, the company would sell participating interests along the value chain.

Upstream, the company’s investor group holds a 19.99% interest, while the government’s Petromin oil and gas company owns 22.5%. InterOil would like to bring in farm-in partners for a 35% share of upstream operations. After farm-ins, the investor group would hold 12.5%, InterOil, 30% and the government would retain its 22.5%.

At the midstream level, InterOil currently holds 52.5% and its Pacific LNG arm holds the remaining 47.5%. Assuming approval of the stripping plant, LNG plant and pipelines, the Pacific LNG share would drop to 12.5%, InterOil would retain 25%, Petromin would hold 10%, farm-in partners would control 42.5%, with the remaining 10% to be determined.

LNG competition

The LNG plant is the key to midstream operations. Once the company obtains government approval, InterOil and its investors must find a market for the output. It will compete for customers with the proposed nearby PNG LNG plant supplied from ExxonMobil’s Hides Field, also in the Papua New Guinea highlands, but a significant distance north of the Elk-Antelope installation.

ExxonMobil had planned to build a pipeline from Hides and nearby fields to the east coast of Australia, but that plan fell through when the company couldn’t find enough buyers. It switched to the $11-billion LNG solution as the alternative, and recently obtained funding from the U.S. Ex-Im Bank.

At least one other company, P3 Global Energy Co. Ltd. of Thailand, with properties purchased from a group of Australia companies, also wants to build an $11-billion LNG plant.

If all goes well, InterOil would like to move its first shipment of LNG from its first train in 2015 and begin shipments from the second train a year later. The company would produce more than 82 million barrels of oil equivalent a year in liquids and gas from 2016 through at least 2024.

The plan, at least initially, involves just the resources InterOil has found to date on its Petroleum Prospecting License (PPL) 238. That license area contains other prospects also named after animals—Mountain Lion, Bighorn, Wolverine, Elephant, etc.

To the west, PPL 237 contains additional InterOil prospects named after real and imaginary prehistoric beasts—Pteranodon, Brontosaurus, T Rex, Seismosauros, etc. To the east, PPL 236 contains prospects named for fish.

In all, InterOil has 40 additional prospects on its property that it wants to investigate.