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Oil Search and its partners in two LNG projects in Papua New Guinea are thought to be targeting a commitment to move into engineering work in November as they work through conditions proposed by the government, including domestic gas obligations and open access to pipeline infrastructure.

The PNG government is said to be keen to announce landmark progress on the massive project during the high-profile Asia-Pacific Economic Cooperation summit in Port Moresby, which culminates with the economic leaders meeting on November 18.

But the LNG partners, led by giants ExxonMobil and France's Total, want to strike the critical "gas agreement" with the PNG government that sets conditions and terms for the expansion before they commit to starting front-end engineering and design (FEED) work. The project is set to involve three new LNG trains, one involving an expansion to the existing Exxon-led PNG LNG venture and two to treat gas from the Papua LNG venture led by Total, which owns the Elk-Antelope gas fields.

Oil Search chief executive Peter Botten in May put a figure of about $US12 billion ($16.4 billion) on the initial cost of the projects, with further investment in gas field development deferred until later to ease funding, including for the PNG government. Santos has a stake in PNG LNG.


The PNG government is expected to impose conditions in the gas agreement that will address some of the issues that emerged in the initial $US19 billion PNG LNG venture, which started up in 2014 and has outperformed expectations but has failed to deliver the expected bonanza for government because of lower oil prices. Meanwhile, the distribution of benefits to local landholders has run seriously behind schedule, resulting in unrest in some communities that have yet to see any upside from the huge and profitable project.

In the gas agreement for this phase of LNG expansion, the government is expected to include provisions that would protect its revenues when prices are low, and to impose conditions requiring the LNG partners to allow open access to their pipelines to improve the development prospects for "stranded" gas fields owned by others in the area.

The government is also expected to impose an obligation on the LNG partners to provide a certain volume of gas for the local market to aid domestic development. While the government is understood to have initially proposed a 15 per cent obligation similar to Western Australia's system, the partners are thought to have suggested a much lower number, of about 5 per cent, given the large size of the gas resource and the very limited gas market in PNG.

Last week's news from Oil Search and Santos of the success at their Barikewa-3 exploration well in the PNG Forelands has increased options around how the partners may fulfil the domestic gas obligation. Independent analyst Scott Ashton of SHA Energy Consulting suggested that gas from Barikewa and from the recent Kimu-2 well in the same region could be used for domestic gas, or to feed into the PNG LNG expansion.

"A key question is whether PNG LNG and/or Papua LNG encourage the development of some of these fields as a way of addressing their own domgas obligations," Mr Ashton said.


He noted that a white paper due soon from the PNG government on future gas sales agreements in PNG is set to also include obligations on domestic gas supply, third party access and local content.

Meanwhile, the Exxon and Total-led ventures are said to be examining options for financing for their respective projects, with two separate debt funding deals expected. The projects are expected to be underpinned by long-term LNG sales contracts with buyers in Asia, with Exxon and Total acting as last-resort backers for Oil Search and the PNG government, respectively on both LNG marketing and financing.