Interoil (IOC) – a Remake of The Producers?

Everyone remembers the movie or play. The promoters sell more than 100% of the stock in a musical to investors, and the only way they can hide the fact is to have a flop, where the investment would go to zero and everyone would walk away none the wiser, the secret of the producers intact.

So it is with IOC. Amid charges of touting and fraud, if the $6 billion LNG (liquid natural gas) plant IOC is trying to build doesn’t get a major partner, the investors will never know whether the charges of fraud about their natural gas find were real or not. IOC will just curl up and wither away.

Just as The Producers were in it for their living so too is the management of IOC. Their announcement of further drilling for oil in Antelope 2 below the dolomite extends their 15 minutes of fame a little while longer. It is always possible they can hit oil. Though the odds are below 50% they are not close to zero and just like in The Producers anything can happen.

Here are excerpts from a new analysis of the IOC well from an expert geologist based on all the public information available:

“IOC published the gas find and took side wall core, which we believe, Schlumberger would not have advised if they really think there is good oil. …

Also these are carbonate reservoirs, they are tricky … as sometimes the “source” of the hydrocarbons just doesn’t have … or what is there “is biologically degraded.” That is why producers say “economic oil” when they report findings. It is possible that there is an oil layer under the gas find, with a secondary trap. It is just as likely to find another [similar] reef formation with no hydrocarbons. This supposition is due to no confirmation from IOC that “casing is set and cemented” or whether the well is being “completed and placed into production”.

Lastly IMAGES of the drilling logs are on the presentation, not the digits, and not the logging headers. The digits … can prove or disprove what is actually there, provided they were properly done, edited, and lined up. There is no recording of how “fast” the pressure returned after the DST (Drill stem test) which regularly flow at multiples of producible volumes.”

From the above it appears the odds are against finding economic oil, though it is not impossible they could. The attractiveness of finding oil for IOC is they do not then need a multi billion dollar investment partner. Exactly how they would use the oil is unclear. The geologist seems to think they would find heavy oil if anything and it is far from clear IOCs existing refinery is equipped for anything but the typical light oil.

Absent finding oil they are back to needing a large multinational partner. There is much talk about China from IOC proponents, how demand in China is growing and how China could be a partner. Well, China has three major international oil companies. One has a project coming on stream very soon in the same area near Australia. Another just signed on to another project in Papua New Guinea and the third mostly does offshore. The proponents won’t say specifically which entity they expect from China to partner with IOC. Morgan Stanley allows for them not getting a partner at all and they cite that possibility as their largest disclosed risk for IOC. Other lesser proponents substitute flowery prose about long term demand from China and Asia in place of careful analysis and actual facts.

IOC is still a somewhat risky short because they can possibly find oil, and it still is possible they could get a partner. It just is not very probable.

Barry Zee

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One Response to Interoil (IOC) – a Remake of The Producers?

  1. W.Kinsolving says:

    It seems, from reports, that a lot of fairly sophisticated people are checking this company’s books and sites, which was not the case with Mr. Bialistock. I’m sure a lot of shady stuff can be hidden, as I’m sure that there may not be any oil. That’s the risk. But there does seem to be a lot of NG in an area that wants and needs it. Isn’t that a good investment in and of itself? IMHO, oil would be the gold coin in the cake.

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