Oil Search and BG join up for Papua New Guinea gas project

Australia's Oil Search Ltd said yesterday it had agreed with BG International to look at the potential for a liquefied natural gas (LNG) project in Papua New Guinea.
The move comes as a project to export gas by pipeline from Oil Search's fields to Australia is in doubt, so could avoid the country's proven reserves of over 15tn cubic feet (Tcf) from being stranded and attract the interest of buyers such as China.
Oil Search said the LNG studies would focus on areas outside the licences that contain the 40% of its gas reserves dedicated to the pipeline. But analysts said it could be trying to hedge its bets by exploring other options.
"We see this initial investigation into LNG as highly complementary to our other gas commercialisation projects in PNG," Managing Director Peter Botten said in a statement.
Analysts said an LNG project would be difficult to achieve but would be more flexible than a pipeline, as it could ship gas to utility buyers in North Asia or to the highest bidder in a world increasingly hungry for the clean fuel.
"If the PNG pipeline doesn't go ahead, I'm not convinced that we'll see an LNG terminal built in PNG for export to Australia. If you could get an LNG plant developed in PNG you'd want to try to sell the LNG into the Asian market," said Frank Harris, co-head of LNG at UK-based consultancy Wood Mackenzie.
"Financing a plant in PNG could be challenging and there is a lot of potential LNG supply ex-Australia out there targeting the Pacific Basin market. I would expect most Asian buyers to view Australian projects more favourably than a PNG LNG project."
Companies plan to bring gas onstream in a host of new fields off Western Australia by 2010, some destined for Asian buyers such as Tokyo Gas, and seen as a more reliable source than impoverished PNG.
The main architect of the PNG pipeline, the Australian Gas Light Co, said on Tuesday it was questionable whether the firm should continue to invest in the project, after saying this month it might suspend design work due to rising costs and a lack of buyers, comments that hit shares of Oil Search.
The $3.5bn pipeline, from fields operated by Exxon Mobil Corp, would provide new gas for Australia's east, where the main Cooper Basin source is waning. But sharp rises in construction and labour costs have hurt its viability.
"It's not easy whether by LNG or pipeline, particularly with costs rising," said Andrew Flower, an independent LNG consultant.
Oil Search's Memorandum of Understanding with BG International Ltd, a wholly owned unit of BG Group., is effective from Friday. British gas giant BG Group has seen soaring profits this year for its LNG business.
Analysts picked China as the country most likely to be interested in LNG from PNG. An official from PNG's Department of Petroleum and Energy said earlier this year that China National Petroleum Corp (CNPC) had discussions with PNG for gas developments, but no agreement had been signed yet.
Gas-hungry China will have to keep scouring the globe for LNG, as it faces up to the higher cost of supplying planned import terminals on the east coast. China National Offshore Oil Co (CNOOC) is hoping for a wave of new LNG supply deals by 2008. - Reuters