Declining oil prices have prompted a review of Oil Search’s activities, even as production hit record levels in 2015. Nevertheless, Papua New Guinea’s largest company says it is generating positive cash-flows and will be making a priority of future investment in the PNG LNG and Papua LNG gas projects.

Oil Search’s Peter Botten

In the company’s latest quarterly report, Managing Director Peter Botten says that while production was at record levels, December quarter revenue fell 10 per cent to $US342.9 million, adding that the company is presently re-assessing its 2016 work programmes to improve efficiency and reduce costs, noting Oil Search liquidity now totals US$1.66 billion.

With spot oil prices now at US$30 a barrel (as of 2 February), Botten says that—based on its current cost structure—the company would generate positive operating cash flow ‘even if oil prices fell to $US20 a barrel’.

The report says the average realised LNG and gas price was $US8.41/mmBtu, down 6% from the previous quarter, while the average realised oil and condensate price fell 14%, to $US42.90 a barrel.

The effect of lower oil prices on the gas price was delayed by about three months, the company report said.

Further falls likely

But analysts paint a gloomy picture of oil and gas prices in 2016.

Once Iran increases production following the removal of international sanctions, oil prices could fall to US$25 a barrel, according to Fereidun Fesharaki, chairman of London-headquartered energy analysts, Facts Global Energy (FGE), quoted by The Times.

The real ‘bloodbath for spot LNG prices’ will come later, added Jeff Brown, President of FGE in Singapore, who estimates prices may fall further and trade in the US$4 to US$5 range between the second half of 2016 and 2018.

That could prompt buyers in Asia to seek revisions to their long-term contracts. ‘We don’t necessarily think that contracts will get renegotiated across the board, but there will be pressure,’ he said.

Oil Search 2016 production

Botten expects production during 2016 will be 27.5 million to 29.5 million barrels of oil equivalent with the upper limit in line with the 29.2 million barrels of oil equivalent produced in 2015.

Bloomberg reports the company expects to write down the value of its Taza oil project in Kurdistan, after disappointing drilling last year.

But Botten says because the existing PNG LNG and the prospective Papua LNG projects are ‘considered to be among the most commercially attractive new LNG projects globally, activities to progress these potential developments will continue to be prioritised’.

He expects details of cost-cutting and expenditure for 2016 will be included in the 2015 full-year results, scheduled to be announced on 23 February.

Takeover target?

Last year, Oil Search rejected takeover offers Botten said undervalued its assets.

But Bernstein analyst Neil Beveridge says Oil Search, along with Santos and InterOil, remain takeover targets this year, most likely by Woodside Petroleum.

‘We expect companies with stronger balance sheets will start to acquire resource-rich but cash-poor E&Ps [exploration and production companies] as it becomes cheaper to drill in the stockmarket than in the ground,’ he says.

Santos is understood to be reviving attempts to sell some or all of its 13% stake in the PNG LNG project. It is also is expected to announce spending cuts on its Australian assets when it reports earnings on February 19.