The refinery has not operated at full capacity since commencing operations and InterOil's profitability may be materially negatively affected if it continues not to do so.
InterOil's refinery has never operated at full capacity for a full fiscal year, as the supplying all of Papua New Guinea’s domestic needs does not require InterOil to operate at such capacity. In addition, InterOil's ability to operate the refinery at its rated capacity must be considered in light of the risks inherent in the operation of, and the difficulties, costs, complications and delays InterOil faces as the operator of, a relatively small refinery. These risks include, without limitation, shortages and delays in the delivery of crude feedstocks or equipment; contractual disagreements; labor shortages or disruptions; difficulties marketing our refined products; parallel importation of refined products, political events; accidents; and unforeseen engineering, design or environmental problems. If these risks prevent InterOil from operating at full capacity in the future, InterOil's profitability may be negatively affected.
The project agreement with the government of Papua New Guinea gives InterOIl certain rights to supply the domestic market in Papua New Guinea with their refined products. However, not all domestic demand was sourced from InterOil's refinery during 2011 as some competing product has been imported and sold in Papua New Guinea, which InterOIl believe, is in contravention of theirr rights.
The refinery is rated to process up to 36,500 barrels of oil per day. InterOil is able to fulfill the domestic market in Papua New Guinea’s demand for their products by refining approximately 18,000 barrels of crude feedstock a day. InterOil is currently operating the refinery at less than full capacity due to an inability to profitably export their refined products and as a result of competing imports of finished products. Therefore, in order to process these additional barrels of crude feedstock, they must identify markets into which they can sell their products profitably. The operating margins currently needed for the refinery to sell refined products profitably and the cost and availability of obtaining tankers to export their refined products limit their ability to export their refined products from Papua New Guinea. In addition, under InterOil's current refinery configuration they are unable to export diesel and gasoline to Australia due to Australian regulations regarding permitted sulfur and benzene content that our refined products currently do not meet.