It’s been a very expensive six months for
AGL since it signed a conditional deal
to buy 10% of Oil Search’s PNG gas project and then announced this
morning it was going to conclude it about
six months earlier than planned.

Doing the deal in fits and starts has
increased its cost by a third – US$400 compared with the initial US$300 million

The market doesn’t mind, pushing up AGL and
Oil Search shares this morning, but it’s still reasonable to wonder why AGL was
fiddling around with the deal last year instead of just doing it at the time.
Maybe management was too busy playing alternative energy games with the
Southern Hydro acquisition instead of being completely focused on what remains
AGL’s main game: gas supply.

AGL CEO Greg Martin tells the open briefing PR session that the jump in the cost comes from higher oil prices and the earlier access to oil
revenue. He can afford to pay the extra as he claims the oil component will pay
all AGL’s debt funded costs and still have a few cents a share left over to add
to profit.

Normally that would look almost too good to
be true, but PNG still carries some completion risk and Oil Search needs AGL on
board to secure its key gas contract and the pipeline.

It has been a very long road for Oil Search
– Australia’s oldest oil company – but this AGL commitment should remove the
last of the doubts about piping gas from PNG to Australia.

AGL is still hedging its completion risk
bets by staggering payment, but it’s also hedging the oil price. If you think
AGL might know something about where oil is heading, Martin says the company is
hedging its oil price exposure 100% for the first four years and then
after that on a rolling basis.

In other words, he’s not betting on the oil
price going any higher. Prudent risk management would require locking in
present prices anyway, although he does offer just a little hint of blue sky by
saying there will be some exposure to oil price movement “in later years.”