PNG: Oil Search announces 32% profit drop
Updated
Papua New Guinea's biggest company, the energy firm Oil Search, has announced a drop in profits of 32 per cent in 2007. The announcement was made on Tuesday morning in Sydney, at the presentation to brokers of the company's full year results. Oil Search's net profit after tax last year was $US140.8 million, down from $US207.5 million in 2006. That's despite record oil prices, which contributed to a 16 per cent rise in the price the company received for its oil.
Presenter: Jemima Garrett
Speakers: Oil Search managing director Peter Botton
BUTTON: The main reason was that the company carried out very substantial exploration activity last year. We spent well in excess of $A200 million on exploration and typical of the oil and gas business, some are successful and some are unsuccessful. And last year, around $A160 million was written off against unsuccessful exploration. So although the core earnings of the company went up through, driven by reasonably flat production, but also high oil prices, the write-offs that take place where from unsuccessful exploration brought our numbers down. It was a pretty good result in terms of cost and how much it would cost to do our business, but the exploration right offs were the major impact.
GARRETT: Nevertheless, in Papua New Guinea, you did see the cost of producing each barrel of oil go up. Why?
BUTTON: Eh, that's a real industry trend. At the moment, the cost of producing barrels of oil in PNG is in the high six dollars, which is in a world context very competitive. But we did see cost pressures as of most Papua New Guineans would see in terms of transportation, air craft costs, all the normal services costs that we have in producing a barrel frankly went up and that's an industry norm. Everybody across the world is seeing that.
GARRETT: The fact that you have had your first big drop in profit in five years, does that signal long term problems for Oil Search?
BUTTON: Eh, no, I mean obviously the impact as I say was primarily around the exploration write- offs, but we do see a smaller exploration program this year and we see production slightly lower this year than last year. Broadly speaking, we think the profitability and the cost control activities that we're doing will see continued sustained strong profitability through to when we hope to develop gas and the positive out of our work is that we see further potential in our existing fields and we hope to have further exploration success. So overall, the outlook is actually very strong.
GARRETT: To what extent were your Middle East and North Africa projects to blame for the poor profit result?
BUTTON: Eh, well they had some contribution, but we did make a net loss out of the Middle East operations. As we signalled in our results presentation, we're looking at working those to a full value to our shareholders. And it's quite likely that some of those assets will be sold. They're getting probably immaterial to us. They're too small to make a real difference and they're worth more in somebody else's hands. So it's likely you'll see that some of those will disappear during the year.
GARRETT: The main game for Oil Search is your gas commercialisation and the LNG project. What is the state of play with the LNG project at the moment?
BUTTON: Eh, well a lot of activity took place in 2007 to mature the LNG project and there have been many, many positives out of that. Fundamentally, the joint venture concerned in developing this project led by Exxon Mobil is seeing a potentially attractive project. Clearly the gas prices and oil prices remain strong. The demand for gas in a world context is extremely strong and the cost base appears to be under control. So we think we're very well situated to develop this project, but there are some requirements before making the front end engineering decision and they primarily come back to finalising, fine tuning now the commercial agreements and also finalising the fiscal terms with the PNG Government. Both of those things are being very actively addressed by the joint venture, the operator and the PNG Government and we're confident that in the short term, we can get through the feed gate.
