Oil Search and ExxonMobil are working on a proposed $3.5 billion pipeline to transport gas from Papua New Guinea's southern highlands to the east coast of Australia.

Oil Search managing director Peter Botten told the ABC's Inside Business program that AGL was a potential customer and negotiations with that company were advanced.

"Discussions are going on with those people to take a volume of gas that may be quite substantial," he said.

While AGL has not yet signed up to buy the gas, it is part of the consortium that will build, manage and own the pipeline.

Botten also said Oil Search wanted Santos Ltd to join the PNG project. Santos has confirmed that the two companies were discussing the issue.

The Port Moresby-based company was also in negotiations with several other customers, according to Botten.

"As the project grows in credibility that there will be a number of other customers that will come forward because they will want PNG gas in their mix," he said.

"Over the next five, seven, eight years you will see the Cooper Basin's production decline dramatically. PNG we believe is going to fill a material part of the east coast market but there are other suppliers as well such as cold seam methane, which is growing some credibility."

Last week, the PNG Gas project won a contract to supply aluminium giant Alcan Inc at its Gove smelter in the Northern Territory, after Alcan cancelled a contract with the Woodside-Eni Australia Blacktip joint venture when the Blacktip partners demanded a 30% price increase.

The first PNG gas is expected to flow into Australia in 2009.

PNG Gas project participants include Oil Search (operator) 54.2%, Exxon Mobil 39.4%, MRDC-PNG Government 3% and Nippon Oil 3.4%.