Oil Search signs PNG gas pipeline deal with Australia's AGL

If the Papua New Guinea gas project is given the green light as is widely expected, it will be the longest pipeline in the southern hemisphere and part of the biggest resource development in Papua New Guinea.
Project stakeholder Oil Search started considering the possibility of the pipeline back in 1997 and now it signed a deal almost guaranteeing the future of the project. Australian Gas Light Company (AGL) agreed to take a $ 300 mm (A$ 400 mm) equity stake along with signing an offtake agreement for the gas.

Oil Search managing director Peter Botten said the AGL deal was a major step forward for the project.
"Like the North West Shelf, they are visionary type projects and there is no doubt they cost a lot of money and take a lot to get up, but when they do get up they provide you with a very long term benefit stream," Mr Botten said.

Key player in the resource and infrastructure project, ExxonMobil, said the development could generate between $ 200 mm and $ 400 mm to the PNG stakeholders in the form of taxes, royalties and profits. The project would boost Papua New Guinea's economic output for the next 15 years to around $ 9 bn.
The economic benefits for Australia are also significant with the project expected to add $ 5.8 bn to gross domestic product over the same period.

Now is the time for such a project to come online with the oil price strong and declining supply to the eastern coast of Australia from the Cooper Basin, according to Daiwa Securities analyst Mark Pervan.
"It is something that is probably warranted in the current energy market," he said. "Queensland is developing quite strongly particularly in the mining industry so there is bigger push for energy demand."

The actual pipeline will start in the Southern Highlands of Papua New Guinea, and will transport dry gas from the Hides, Kutubu and Gobe oil fields. The main contributors, Kutubu and Hides, lie about 570 km to the north west of the Papua New Guinea capital Port Morseby.
The pipeline from theoilfields to the PNG border is the upstream section of the PNG Gas project and will be designed, built, owned and operated by Oil Search (54.2 %) and ExxonMobil (39.4 %), with a Papua New Guinea company representing landowner interests, MRDC, holding a 3 % stake and Nippon Oil holding 3.4 %. There are rumours speculating that Santos, which owns part of the Southern Highlands oil fields, would consider taking an interest in the upstream section.

The Papua New Guinea border marks the beginning of the downstream portion of the pipeline down to Australia, and will be built, owned and operated by AGL and Malaysia's national petroleum company, Petronas. On paper the pipeline is developing rapidly with a front end engineering and design study underway with the project slated for a 2009 commissioning.
Delivering the huge infrastructure feat rests on securing enough gas buyers, and it is this first hurdle the project has almost cleared. The project can supply 200 PetaJoules a year of gas and the joint venture partners Oil Search and ExxonMobil have recently secured two important offtake agreements. The most recent was the $ 4.5 bn deal struck with AGL, which will take around 75 PetaJoules a year for 20 years for a total of around 1,500 PetaJoules.

AGL also entered a conditional agreement with Oil Search to take a 10 % stake in the project for $ 300 mm. Towards the end of June, aluminium refiner Alcan canned a deal to take gas from Woodside Petroleum's Blacktip oil field in the Joseph Bonaparte gulf to the north of the Northern Territory. Alcan instead decided to opt for PNG gas, signing on for 43.5 PetaJoules a year for 20 years. It will use the gas as the primary energy at its expanded Gove refinery in the Northern Territory.
Other customers include WMC Resources, now part of BHP Billiton, which agreed to take 12-20 PetaJoules a year for 20 years to fuel its Olympic Dam project in South Australia.

The Queensland government's Energex signed on as a customer in 2003 for between 24 and 60 PetaJoules a yearand another state agency CS Energy also agreed to take around 10 PetaJoules a year. After signing the most recent and the largest deal with AGL, Oil Search and ExxonMobil said a total of between 3,300 and 4,750 PetaJoules had now been sold.
"While there are additional volumes available, our marketing focus now is on converting these arrangements to binding sales contracts capable of supporting a project sanction decision in early 2006," said ExxonMobil vice president of new business development Rob Franklin.

Converting these agreements and finalising other commercial arrangements are still required for the project to go ahead. Before committing to any project decision all companies involved must also organise funding with financial close expected in the second half of next year.
Finding the money won't be a problem for these companies, representing some of the biggest oil and gas companies in the world, said Mr Pervan.
"In the current environment these big players are making huge amounts of money so they have a lot of free cash... and they are probably more prepared to commit to a development of this scale and risk. In a tougher oil environment this would never have got over the line."

The oil price is expected to maintain its strength and recently traded above a record high of $ 61.
Mr Pervan said China's desire to build its oil reserves would ensure oil held above $ 40 a barrel until the Papua New Guinea gas pipeline came online.