CANBERRA (Dow Jones)--Papua New Guinea-to-Queensland gas project operator Exxon Mobil Corp. (XOM) Wednesday said it is continuing to market gas from the project after foundation customer Australian Gas Light Co. (A.AGL) said it is unlikely to require PNG gas from 2006.

AGL had an agreement with the project to take up to 50 petajoules of natural gas a year from 2006, the expected start date of the A$6.8 billion project.

Oil Search Ltd. (A.OSH) is the biggest single stakeholder in the project. Its shares dived more than 22% in early share market trade in response to the AGL announcement.

"AGL is reassessing its requirements for PNG Gas and will continue to discuss timing for potential future requirements with the project," Exxon Mobil said in a statement. "AGL has indicated it will maintain its role along with Petronas as the PNG pipeline owner and operator," Exxon Mobil said.

The announcement follows news that AGL has contracted to buy gas from a range of Australian sources, including producers in the Cooper and Gippsland Basins, and producers of coal seam methane producers in Queensland state.

Oil Search, with 45% of the project, was down 16 cents or 20% to 64 cents at about 2325 GMT. The stock reached a 60 cent low.

18dec02

OIL Search shares fell sharply today after AGL's decision that it is unlikely to require PNG gas from 2006.

Australia's biggest gas retailer - AGL - today informed the PNG to Queensland gas pipeline partners that it was reassessing its requirements for PNG gas.

AGL said it will continue to discuss timing for potential future requirements with the project.

The listed oil company Oil Search - which has a 37 per cent interest in the persistently-delayed project - have fallen 25 per cent at the open or 20 cents to 59 cents on heavy turnover of 26 million turnover.

Esso Highlands president and chairman of the PNG Gas Project Owners Group, Bill Threlfall, said that the Project Owners are continuing negotiations with a number of potential customers and have extended negotiations to potential customers in the Northern Territory.

"The PNG Gas Project Owners Group will continue to work toward a FEED decision as early as sufficient market demand is secured," said Mr Threlfall.

Oil Search managing director Peter Botten said AGL's decision was disappointing, as it came at a time when the project was making material progress in signing customers and delivering all requirements in preparation for a decision to move to Front End Engineering and Design (FEED) very early in 2003.

"This decision will not change the present focus of the project group, in that it will continue to finalise the FEED program and budget for a decision at an early date in 2003."

Meanwhile, Santos and the other Cooper Basin producers today signed two new long-term contracts with AGL to supply from 2003 until 2016.

The deal is worth in excess of $2 billion to the Cooper Basin producers for the gas and associated liquids and condensates.

AGL managing director Greg Martin said its new gas supply arrangements would secure its future gas requirements with a suite of new portfolio and transportation requirements for the NSW, Victorian, SA, Qld and ACT markets.

AGl said it became the foundation customer in the PNG pipeline project in March with the "expectation that other customers would commit in a timely fashion to allow AGL to meets its 2006 requirements for additional gas at Moomba".

Mr Martin said the delay in signing other customer commitments in Queensland had resulted in AGL entering new arrangements to meet existing needs.

"AGL remains of the view that alternative sources of gas are essential in the longer term to maintain competitive prices and meet forecast demand in the Australian gas market," Mr martin said.

He said that recent developments in northern Australia gave AGL confidence that PNG gas could contribute to satisfying these market requirements.

AGL, through its role as preferred developer of the PNG project, said it will continue to support the proposed pipeline.

Oil Search had eased 19 cents or 24 per cent to 61 cents on 32 million turnover by 1052 AEDT.