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PNG: Oil Search shelves LNG plant pipeline project

01 Feb 2007

Papua New Guinea oil and gas producer Oil Search Ltd and ExxonMobil have shelved a troubled $3.5 billion PNG-to-Australia pipeline project to focus on more profitable gas projects in the country. The venture partners in the PNG gas project are working on higher-value options, including building a liquefied natural gas (LNG) facility or a petrochemical plant, Oil Search said in a statement earlier today. The change in plan comes as Asian buyers face growing demand for cleaner fuel and a shortfall in Indonesian LNG exports. "It's certainly a good move for Oil Search to shelf the pipeline project since international gas prices are much higher compared to Australian gas prices. Returns from the LNG project will definitely be higher," said Paul Balfe, executive director at ACIL Consulting. Shares of Australian-listed Oil Search, which had fallen about 8% from a year ago. Oil Search has said a study completed by ExxonMobil 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. Although several other LNG projects were expected to come onstream at the same time, including Woodside Petroleum's Pluto and Browse project in Western Australia, analysts said there would be no shortage of demand for LNG. "All market forecasts are indicating a very big appetite for gas, particularly in China as it changes its fuel supply mix to bring in more gas," Balfe said. ExxonMobil is the operator of the Hides and Angore fields, which had been earmarked to supply the pipeline with the other stakeholders in the fields being Nippon Oil Exploration Ltd, Santos and MRDC, a PNG company representing landowner interests. Oil Search is the main owner of the gas reserves for the proposed $3.5 billion pipeline project, which has been stalled for at least six years due to a lack of buyers and rising costs. Based on Oil Search's 2005 annual report, the Hides field has an estimated gas reserve of 5 trillion cubic feet (Tcf) while the nearby Kutubu field, which had also been slated to supply the pipeline, has a forecast reserve of 1 to 2 TCF of gas. Oil Search was exploring a range of development options for the joint venture Kutubu field, including supplying ExxonMobil's mooted LNG plant, having a separate LNG facility or building a petrochemical facility. Oil Search is the operator of the Kutubu field, located about 550 kilometres northwest of the PNG capital, Port Moresby. The other venture partners include ExxonMobil, which holds a 14.52% stake and AGL Energy Ltd with 11.9% with the remainder split between Petroleum Resources Ltd and Merlin Petroleum, a division of Nippon Oil Exploration. A study done along with the BG Group found that the Kutubu joint venture, if backed by one or more other gas fields in Oil Search's portfolio, could proceed with an LNG facility, which would have an annual capacity of between 3-4 million tonnes and make first deliveries by 2012. Botten said the potential cost of liquefaction ranged between $600 to $800 per tonne of capacity and that the company 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 bet, which project to pursue, by the middle of 2007," he said. Oil Search said in a statement earlier the Kutubu venture partners were reviewing supplying gas to a planned methanol and dimethyl ether (DME) plant in Port Moresby, led by Japan's Mitsubishi Gas and Itochu Corp. Subject to reaching an agreement on gas supply terms, Mitsubishi Gas and Itochu plan to complete engineering and design work on the plant by 2007, with a project investment decision at the end of 2008 and first production in 2011. AGL, which pulled out as the main architect for the pipeline project last August, said that the gas supply agreement with the PNG gas partners to buy 1,500 petajoules of gas had lapsed following the suspension of the pipeline project.

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