Papua New Guinea-Australia pipeline costs blow out by a third - MarketWatch


SYDNEY (MarketWatch) -- Development costs of the planned Papua New Guinea to Australia gas pipeline now total up to A$4 billion (US$2.9 billion), blowing out by up to one third and prompting The Australian Gas Light Co. (AGL.AU) to review its role and the pipeline's route.
The sanction timetable for the pipeline, which aims to transport gas from Oil Search Ltd. (OSH.AU) and Exxon Mobil Corp.'s (XOM) PNG fields, is also expected to be delayed, AGL chief executive Paul Anthony said Wednesday in a presentation hosted by investment bank UBS.
While the timetable is likely to be extended by "months", a decision is still expected in the second half of 2006, an AGL spokeswoman said later. In the briefing notes, Anthony confirmed comments made to Dow Jones Newswires in May that he might bring in global partners with more pipeline experience, reducing AGL's 50% stake.
The delays come a week after Oil Search confirmed it won't meet its first half sanction target for the US$2.5 billion upstream PNG Gas project, with a ruling now due in the 2006 second half.
Anthony said the cost of the pipeline, which is owned by AGL and Malaysia's Petronas Gas Bhd (6033.KU), has jumped to between A$3.5 billion and A$4 billion from an earlier estimate of A$3 billion.
While thehigher price hasn't dented AGL's confidence the pipeline will go ahead, higher tariffs charged by the owners might mean the profitability of the PNG Gas upstream project, which sells the gas, is cut.
Exxon and Oil Search weren't available to comment.
"The danger for Oil Search is that they could have to take lower margins for gas they've committed to sell," said a Sydney-based energy analyst who asked not to be named.
Oil Search shares fell 3.3% to A$3.85 after the potential pipeline cost blowout was revealed. Shares of AGL, which also has a 10% stake in the gas project, eased 1%.
Papua New Guinea's Deputy Prime Minister Moi Avei earlier this month said he is "quietly confident" the twin projects will proceed. He also said issues including a cost blowout of the pipeline need addressing.
AGL at the time declined to comment.
Alinta Infrastructure Holdings (AIHCA.AU) chief executive John Cahill, for whom the gas pipeline is a potential competitor, said it appears unlikely the PNG link will achieve its 2009 timetable.
Cahill also said AGL's purchase of a 50% interest in BHP Billiton's (BHP) Moranbah coal seam gas project in Queensland state is a hedge against completion risk.
Moranbah has a pipeline link to the coastal city of Townsville, where AGL is planning to build a gas-fired power station and where the Papua New Guinea pipeline is planned to pass through.
The AGL spokeswoman said the Moranbah purchase doesn't indicate any lack of faith in the PNG Gas project.
"It's prudent to have diversity of supply," she said.
AGL is looking at using existing pipelines or those planned by others to reduce the cost of the PNG to Australia infrastructure, the spokeswoman said.
Its options include Queensland state company Enertrade's Townsville to Moranbah pipeline, which also has a planned extension to the coastal town of Gladstone. Another option is to revive a plan to build a pipeline to the western Queensland town of Mt Isa and then pump to South Australia through an existing pipeline.
-Edited by Ian Pemberton
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