Under the agreement, Power and Water has agreed to purchase a minimum additional 5.2 petajoules of gas from now until December 31, 2008. Power and Water has also agreed to buy all its additional gas requirements from the Mereenie producers for two years after this contract expires.

If demand outstrips supply during the initial period, the deal also provides for Power and Water to purchase any extra gas it needs from the Mereenie and Palm Valley gas fields, and has signed all its additional gas requirements.

Last December, Power and Water signed an in-principle agreement to purchase all gas produced from Eni Australia’s Blacktip field. This deal was expected to meet the utility’s gas supply needs from 2009 to 2031.

Magellan has said if a final gas sales agreement is reached between Power and Water Corporation and Eni Australia, it will affect Magellan’s ability to secure immediate contracts for its uncontracted gas resources from the Mereenie gas field beyond 2009.

But Magellan told the ASX yesterday that the HOA with Eni only contemplated exclusive negotiations and “therefore there is no certainty that a final, binding agreement will be concluded”.

The Mereenie oil and gas field, in which Magellan has a 35% interest, is located about 250km west of Alice Springs in the Amadeus Basin of the Northern Territory.

It is the only producing oil field in the Northern Territory, and together with the nearby Palm Valley gas field, currently provides gas to meet the whole of the Northern Territory’s domestic gas market.

The Mereenie field is currently producing about 900 barrels of oil and condensate and 40 million cubic feet of gas per day.