In the wake of this news, shares in the company plunged for a second straight day, falling almost 19% to $C27.96 ($US26.12) on Wednesday.

The stock had dropped 27% or $C12.57 on Tuesday.

The drop came as the company reported that an interim drill stem test at Elk-2 had produced only a limited flow of gas from the top of the target Puri limestone section.

InterOil said that more definitive results would be available after the well was drilled to its planned total depth of 3050m and testing and logging was completed.

Further geological, geophysical and appraisal work could be needed before confirmation of gas reserves.

The well was designed to delineate the size of the company’s massive Elk discovery, said to contain trillions of cubic feet of gas, enough to underpin an LNG facility in the South Pacific nation.

Elk-2 is about 4.7km northwest of the Elk-1 discovery, which InterOil had been confident could underpin an LNG joint venture between itself, global merchant bank Merrill Lynch and Clarion Finance.

InterOil has also said that the project could be a gas-gathering scheme. But if the bulk of its gas didn't come from InterOil fields, the economics of the project would be very different for InterOil.

The company added that no formation water was detected during the flow of gas to surface and the confirmed minimum gas column was projected to be 715m from the highest known gas in Elk-1 to the top of Puri in Elk-2.

The company has drilled Elk-2 to a depth of 2647m and will continue to core, drill and test prospective intervals in the Puri and Mendi limestone formations as planned.

Following the acquisition of a core in the Mendi limestone, the well will be drilled to total depth at the base of the limestone where full formation evaluation will be performed, including wireline logs, rotary sidewall cores, VSP and additional drill stem tests.

InterOil plans to drill deep enough to confirm a definitive gas/water contact and to check for the presence of a crude oil leg in the reservoir.