PNG-Australia Gas Pipeline In Jeopardy

The proposed three and a half billion dollar Papua New Guinea to Australia gas pipeline suffered a major blow yesterday when the developers, led by ExxonMobil Corp, missed out on a key supply contract.

The future of the three thousand two hundred kilometre pipeline project, which was planned to deliver more than six trillion cubic feet of PNG’s gas to Queensland, is now in doubt as many potential customers needed to underpin the project, such as Townsville, have not signed up.

The Queensland government said it had chosen the state owned Enertrade as the preferred developer for the A$500 million power infrastructure package including the 220 megawatt Townsville power station to be fired by coal seam methane gas.

Enertrade beat a rival bid from the Australian Gas Light Company and Queensland state-owned generator Stanwell Corp, which had signed a deal to use the PNG gas.

They were short listed alongside a third bid from Origin Energy.

Just last week Trevor Kennedy, the Chairman of Oil Search Ltd which has a thirty seven percent stake in the PNG-to-Queensland project, said that discussions were being held with more than a dozen potential customers for the PNG pipeline.

But he stressed the importance of winning the Townsville power infrastructure contract saying that all of the potential customers were looking to it to build confidence and momentum for the PNG-to-Queensland pipeline development.

Oil Search shares plunged by almost eighteen percent to A$0.88 on the news before being suspended from trading on the Australian Stock Exchange.

The company later said it would hold discussions with potential gas customers and the sponsors of the pipeline but did not expect the project to be delayed.

"(Townsville) was a key contract needed to kickstart the PNG gas project so all of that is up in the air at the moment. The risk is that the PNG gas project may not go ahead," said Nick Sproats, equities dealer at BT Funds Management.

A spokeswoman for ExxonMobil said the consortium was "obviously disappointed" by the decision and would be re-evaluating its position.

"But we continue to have significant gas sales opportunities at an advanced stage of negotiations," the spokeswoman told Reuters.

Merrill Lynch analyst Stuart Smith said while the loss of the Townsville project was significant, it was not necessarily fatal to the PNG pipeline.

"It does make it a lot more difficult. They're going to have to get a lot more 'yes's' out of the remaining customers on the list," Stuart Smith said.

The PNG-to-Queensland pipeline has already been signed to supply gas over 20 years, starting from 2006, to the Australian Gas Light Co.

The Papua New Guinea government is due to formally sign an agreement this week setting out the terms and conditions for the project after more than three years of negotiations.

Oil Search executives were not available for comment yesterday.

Origin, the other losing bidder, said it would continue with its commercial strategy.

"Origin will continue to pursue its strategy to secure other opportunities to commercialise coal seam methane gas in Queensland and other markets," Origin Energy's managing director Grant King said in a statement.

Origin Energy shares, which had climbed to a record high of A$3.48 last week on optimism that it would win the Townsville contract, closed down 4.7 per cent at A$3.24.

Queensland's deputy premier and treasurer Terry Mackenroth said Enertrade has been chosen because its bid represented reliability of supply and best value for money.

"The PNG gas project will need to re-evaluate its position, but we continue to have a number of significant gas sales opportunities which are at an advanced stage of negotiation," said ExxonMobil spokeswoman Anna Schulze.

AGL was one of three groups short-listed as a potential supplier of electricity to Townsville. The third company was Origin Energy Ltd, which also proposed using methane.

The Enertrade plan proposes to ship the methane by pipeline to an expanded Townsville Power Station, owned by Transfield Services Ltd.

"There are numerous other users of the PNG gas, but this was pretty important" in creating a demand base, said Stuart Smith, an analyst with Merrill Lynch & Co in Melbourne.

"It doesn't kill the gas project, but it makes it a lot harder to get the foundation load they need to get across the line."

Rio Tinto Group, when announcing the construction of a $750 million alumina plant at Gladstone last October, said it may consider using PNG gas.

The pipeline partners have also been trying to sign up several electricity companies owned by the Queensland state government.

"The PNG gas project is obviously disappointed with the decision of the Queensland government," Exxon's Schulze said.

"We will be seeking an early meeting with the government to understand the full details of this decision."

AGL said it still plans to buy gas from PNG.

"As of today, we are still a willing buyer of gas from the PNG gas pipeline," said Geoff Donohue, an AGL spokesman.

"This decision makes the economics of the PNG project a little more difficult, but it is probably up to Exxon to determine what the future is," Geoff Donohue said.

The PNG government will sign an agreement to approve the pipeline within days, the Australian newspaper reported yesterday.

Terms of the government's investment in the project have yet to be settled, the newspaper said, with the government unlikely to be able to find enough cash for the 30 per cent stake it wants.

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