Illustration: michaelmucci.com

The highlands of Papua New Guinea are the most expensive place in the world to drill for oil, onshore that is.

This is hostile terrain, rugged and remote. Everything from the drill rig to the workers has to be flown in by helicopter. So the well-heeled speculator can expect to spend $100 million drilling a well, whether it’s a “duster” or not. It’s a fancy punt when you consider the long odds of producing a return.

PNG is laced with hydrocarbons, so the chances are you will find some gas, but this is not Europe; there is no market for gas. And whatever you do find, extracting it is the greater challenge. Even if the technical stars align, the PNG government is there for a 20 per cent free carry.

That’s right, you spend $100 million and the government snips a tidy one-fifth of your billion-dollar revenue, simply because it can.

And still they do it, for the risks might be high but so are the potential riches. It is why Exxon is spending $15 billion to develop its LNG project with Oil Search.

Cash-strapped as it is, Port Moresby has flicked on a part of its share to the Kuwaitis for cash. Besides these sovereign interests, the principals Oil Search and Exxon hold 29 per cent and 33.2 per cent respectively, and the lesser stakeholders Santos and Nippon Oil and Papua New Guinea’s tribes have been cut in for 2.8 per cent.

Oil has become big politics in PNG, dividing the spoils and so forth. This project alone doubles the country’s gross domestic product. And so it was that the region was rattled this week by news of the attempted coup d’etat by the former prime minister Sir Michael Somare.

Our northern neighbour can ill afford a capital flight, let alone a fright. PNG is entirely dependent on foreign capital and expertise to develop its resources. Even with its reserves proven, Oil Search still had to bring in Exxon to build its LNG plant.

Suddenly this week the sovereign risk of PNG was put in stark relief – although consumers of news might have missed it amid the high drama of Julia Gillard losing her shoe in a scuffle and other matters of consequence such as the cricket.

The risk premium for playing in PNG just got a good deal bigger, and it is unlikely to ease before the national elections later this year, thanks to the way that loyalties are split – the Prime Minister, Peter O’Neill, appears to be backed by the top tier of the military, the senior end of the public service and the petroleum department.

But he ignored his own Supreme Court and has left Somare, with support in the lower echelons of the military and strong tribal fealties, clinging to some constitutional high ground. Somare was still vowing yesterday to go on with the fight.

It’s not over yet.

If it has raised risk all round, Somare’s foiled coup has really lifted the stakes for InterOil. This is the “other PNG LNG project” and perhaps the most controversial stock in the oil and gas market, not to mention the most short-sold.

InterOil shares have rallied of late on the coat-tails of the Oil Search-Exxon venture, a “short-squeeze” and some spruiking out of New York by, among others, the actor Shia LaBoeuf of the movie Wall Street: Money Never Sleeps fame. But Somare is its number one political champion.

Even without the military fracas, crunch time was approaching for InterOil. It claims to have discovered an “elephant”; a gas field called Antelope 1 with a flow rate of 382 million cubic feet of gas and 5000 barrels of condensate a day – a world record no less. And that’s just Antelope 1. Antelope 2, they say, is even bigger.

InterOil’s problem is that it is widely ridiculed for being tied up with colourful Vancouver stock promoter Carlo Civelli and being, as one observer put it, “all hat and no cattle”.

Despite its rich claims and myriad announcements of LNG contracts and the like, which treat a multibillion-dollar LNG plant as a done deal, it is yet to convince the market that it has the gas “flow rates” to deliver an economic proposition.

Bottom line? The PNG oil ministry is waiting for InterOil to attract some interest from Big Oil, a joint venture partner such as Exxon is to Oil Search. This was supposed to have happened by now.

For its part, InterOil doesn’t reckon it needs an Exxon. It has Energy World Corporation, it says. The Oil Search plant, at 2.5 million tonnes, is slated to cost $15 billion while InterOil claims its 2 million tonne plant will cost $6 billion to $8 billion. It says it has struck a deal with Hong Kong-based, ASX-listed Energy World Corp to build the plant.

Given this mammoth project you would expect EWC to be shouting Antelope from the rooftops. Not so; the deal with InterOil gets roughly the same billing on the EWC website as a hotel development in Valletta, capital of the Mediterranean island of Malta.

Mind you, in EWC’s defence, it is a “450-room, five star deluxe hotel on the former Grand Hotel Excelsior site” with, wait for it, a marina.

Speculation as to the bona fides of InterOil in PNG has been running for a decade now. The stock price is hot. Some big brokers – the likes of Goldman Sachs, Morgan Stanley, Macquarie – have got behind it. On the other side, sceptical hedge funds are as short as they can get. The oil world waits for confirmation on flow rates.

The truth should, finally, soon be known.