The new contracts are among the largest sales agreements for Cooper Basin gas since the early 1970s and represent a major swing away from PNG gas, whose proponents were on the brink of gaining the necessary volumes to justify the $6.8 billion project.

In a deal worth an estimated $2 billion to Cooper Basin producers, AGL has agreed to purchase up to a total of 505 petajoules gas over 13 years with first deliveries to begin next year.

"This is a significant new achievement for Santos and its joint venture partners, delivering gas under long-term contracts into the eastern Australia energy market," said Santos's managing director, John Ellice-Flint.

"Importantly, this agreement recognises the security and reliability of supply of gas from the Cooper Basin. It underpins the gas volumes needed by AGL to compete in the national energy market."

Not so enamoured by the deal was Oil Search, one of chief proponents of PNG Gas project, which has seen its share price plunge 23 cents to 57c. Yesterday, its shares were trading at 80c due to gas talks with ExxonMobil.

Trying to put a positive spin on the AGL decision, Oil Search told the market that AGL themselves acknowledged that PNG gas is essential in ensuring competitively priced energy for eastern and northern Australia.

"Whilst intense competition from incumbent suppliers must be expected, especially in the southern markets, project sponsors believe that PNG Gas has a clear niche in northern and eastern Australia," Santos said.