Francine Pennington, Steve Rotherham
Thursday, 1 February 2007

OIL Search will abandon its troubled $8 billion Papua New Guinea-Queensland gas pipeline project, saying the costs and returns were not attractive when compared to other options, such as liquefied natural gas or petrochemical plants.

"The world has caught up with and passed the PNG pipeline project with new opportunities that offer higher value," managing director Peter Botten said in a conference call to journalists and analysts.

This morning's announcement comes despite the PNG-focused company stating in its December quarterly report, released Tuesday, that the project was still "economically viable".

In a release to the Australian Stock Exchange, Botten reiterated comments from the quarterly report that the company had received a positive response after seeking expressions of interest from pipeline builders and owners for the project, including a revised proposal to build the gas pipeline through Mt Isa in Queensland.

"The submissions confirmed Oil Search's belief that the PNG gas project is an attractive investment option, based on appropriate cost control and continued strong market support," he said.

"Nonetheless, it is clear that the alternative development options, including LNG, petrochemicals and other in-country options, which were not present two years ago, are now demonstrably more attractive and cannot be ignored."

Botten conceded that part of the problem was low gas prices in eastern Australia.

"We see the eastern Australian gas market as being relatively constrained," he said.

"The prices are at a significant discount to world prices. There is an effective cap on gas prices in that market because of the abundance of coal [which offers the ability to switch power sources]."

Botten said Oil Search's preferred option for gas commercialisation was LNG, as this would produce the highest returns for the company. But petrochemical developments were also more attractive than the pipeline option.

Oil Search was likely to participate in an ExxonMobil-led LNG development that would draw on the Hides gas fields, according to Botten.

The company's Kutubu fields could also be linked with the Hides LNG project or they could supply a separate LNG project led by British major BG. It was also possible that Kutubu gas would be used for petrochemical projects rather than LNG, he said.

LNG and petrochemicals would offer greater medium and long-term value and growth potential for both Oil Search and PNG than the pipeline could have, according to Botten.

Oil Search expects to make a decision on how to develop these fields by the middle of this year, he said.

In a separate statement, AGL Energy said it believed the PNG gas project was still potentially viable in view of eastern Australia's long-term demand for natural gas

"AGL will be working closely with all parties in the project to extract maximum value from its gas reserves which it acquired for a very modest consideration. The future developments will include a range of other gas project concepts including LNG and petrochemicals and we expect to make a decision on these projects later this year."

The PNG gas project participants are Australian-listed Oil Search, US-based ExxonMobil, PNG's MRDC and Japan's Nippon Oil Exploration.

PNG LNG ASAP

NOW that Oil Search has finally admitted that the PNG pipeline was not a good option, attention has shifted to liquefied natural gas as a way of commercialising Papua New Guinea's gas resources. In just a few years, the country could have as many as three LNG projects operating.

The PNG pipeline's most passionate backer, Oil Search, has now conceded that LNG is a much more attractive option for commercialising PNG gas.

Piping gas across the seabed into one of the world's cheapest gas markets always seemed to be a marginal proposition, and it is clear now that the pipeline's backers failed to understand the potential of Queensland's coal seam methane blocks.

But LNG might well deliver where the pipeline could not.

Oil Search managing director Peter Botten told journalists and analysts in a conference call that overseas companies were showing great interest in PNG's LNG potential.

"Subject to the right participation by the right partners, the market is there for PNG liquefied natural gas," he said.

Oil Search was considering two separate projects, one led by ExxonMobil and another led by British major BG, according to Botten.

The company was very likely to participate in an ExxonMobil-led LNG development that would draw on the Hides gas fields, according to Botten.

Oil Search's Kutubu fields could also be linked with the Hides LNG project or they could supply a separate LNG project led by British major BG. It was also possible that Kutubu gas would be used for petrochemical projects rather than LNG, he said.

According to Botten, a study completed by Exxon Mobil showed there were sufficient reserves in the Hides and Angore fields to underwrite a "single mid-sized train LNG development", with first deliveries targeted for around 2013.

Another study done in partnership with BG found that the Kutubu joint venture, if backed by one or more other gas fields in Oil Search's portfolio, such as Juha, could proceed with an LNG facility with an annual capacity of between 3 million and 4 million tonnes that could be ready for first shipments by 2012.

Botten said the potential cost of liquefaction ranged between $600 and $800 per tonne of capacity and Oil Search was in commercial discussions with BG Group on developing the LNG plant and BG's possible entry terms.

"We are targeting to have a decision on which horse to back, which project to pursue, by mid-2007," he said.

But ExxonMobil has warned that an LNG plant drawing on Highlands gas fields would face similar cost pressures to the pipeline project.

"The remoteness of the gas field from a suitable plant and marine terminal site will add to costs and the initial sizing of an LNG plant will be limited to a single train by currently available reserves," said ExxonMobil.

Botten himself has previously conceded commercialising Highlands gas via LNG would be difficult.

"An LNG project without other projects coming to help the infrastructure will always be a very, very tough business in PNG," he said last August.

"That's not to say it can't be done, especially in this present gas price market. But I don't believe it is the optimal first development."

Oil Search has previously indicated it was looking at liquefaction plant sites near Wewak on PNG's north coast, as this port has good shipping access to giant Asian markets.

But Oil Search has a rival that is planning to develop lowland gas fields for shipment from Port Moresby in southeast PNG.

PNG LNG, the privately held company that will develop the $US4-6 billion LNG project, has set itself a schedule that could see two LNG trains built at its proposed site in Port Moresby, with the first LNG shipment ready by 2011.

Set up by project partners InterOil, Merrill Lynch and Clarion Finance, PNG LNG has had a coup in recruiting former North West Shelf director Jack Hamilton as its chief executive.

While other players in the region such as Oil Search, ExxonMobil and Santos have LNG project studies underway, PNG LNG is the only company to be moving on a plan.

The current one-train program is based on reserves from InterOil's Elk discovery and anticipated reserves to come from the nearby Antelope prospect, which together are expected to hold more than 3 trillion cubic feet (Tcf) of gas. Good results from a second Elk well and Antelope-1 would give PNG LNG the confidence to start work on the first train in the second quarter of 2007.

Hamilton said as long as results from Antelope "don't hold any surprises" contracts would be awarded for basis of design (BOD) and front-end engineering and design (FEED) work on the plant, which would begin in August 2007.

InterOil will start upstream work at Elk at the same time. The plant will be built next door to InterOil's 30,000 barrel a day oil refinery at Port Moresby, negating any landholder issues and providing access to infrastructure.

BOD and FEED work should take about 15 months, which would take PNG LNG through to the third quarter of 2008.

Design and engineering success, along with the results from another three wells that will upgrade the reserve, will be used to secure finance. Financial close is expected by the end of 2008.

By this schedule, the first cargo is due by December 2011, with the second train a distinct possibility a year later.

It is estimated that about 5000 people will be needed to build the plant, with 150 to maintain it once it is operating.

Labour would be sourced from the Philippines and Indonesia, Hamilton said, with professional engineering services to be outsourced.

He added that the tight skills market was unlikely to cause significant problems for PNG LNG because many of the projects currently planned in the Asia-Pacific region would not go ahead.

Hamilton said he was sceptical of rival LNG plans, saying it was unlikely that more than one LNG project in Papua New Guinea would come to fruition, and gas reserves owned by other companies would find their way to the first economic project for refining and shipping.

"There's always the potential for more LNG projects but the reality is that there'll probably be only one," he said.

"It would be a significant waste of resources [to have more than one LNG project]. It's far easier to develop a brownfields project and continue to expand it than try to do three greenfields projects."

PNG had about 30Tcf of gas upon which significant gas businesses could be based, Hamilton said.

"If we keep pushing ahead on the Elk discovery, hopefully commercial commonsense will prevail and other companies will look to sell gas to us."

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