The decision follows a meeting of partners in Melbourne this week to discuss the prospects of the ExxonMobil-led project in wake of the Queensland Government's decision not to award the Townsville contract to PNG.

Although it is not a final commitment to proceed to development, the decision to start initial engineering work reflects the project partners' confidence of securing enough base-load gas contracts for the project to go ahead.

"We believe there are sufficient customers in the energy market for the project to proceed without Townsville, but timing in now of the essence," said president of Esso Highlands and chairman of the PNG Gas project owners group, Bill Threlfall.

"By funding preliminary engineering work, we will reduce the time required to reach a development decision point and enhance our ability to deliver gas in 2006."

The decision by the Queensland Government to support the burgeoning coalbed methane industry was seen by many in the market as a slap in the face for the pipeline project. While not a project-maker, the failure to get the 20-petajoule a year contract could have seen the $7 billion pipeline project fold altogether.

However, it is understood a re-routing of the pipeline from PNG to Mt Isa is now being considered and project partners are talking to other potential customers. "If successful, these sales will provide the volumes required for the project to proceed," Mr Threlfall said.

The project has already secured a conditional agreement with Australian Gas Light for 40 to 50 petajoules of gas a year with conditional commitments from industrial customers in Queensland for another 50 petajoules.

That would mean that the project may need only another 10-20 petajoules a year for the partners to give the green light.

Oil Search is the largest equity holder behind ExxonMobil. Other partners include ChevronTexaco, MRDC and Japan PNG Petroleum.

Shares in Oil Search rose 3 cents after the announcement, which suggests the market is still sceptical about the pipeline.