AGL managing director Paul Anthony said escalating costs and lack of a critical mass of foundation customers had forced the decision.

"The commitment of sufficient foundation load from other customers, in addition to us, is a pre-requisite to progressing the project further," he said.

AGL's own agreement to buy gas from the project remains subject to the upstream PNG gas project reaching financial close.

AGL has decided to write off $25.1 million pre-tax ($18.3 million after tax) in FEED costs incurred to June 30, 2006 as a significant item.

AGL said high-level discussions were held on the status of the project with the Exxon Mobil-led PNG Gas producers and Petronas early this week.

“On the basis of discussions with the PNG Gas producers and the continued lack of committed foundation gas load in an environment of continually escalating construction costs, AGL and Petronas have decided to scale back FEED activities,” Anthony said.

“The majority of the budgeted FEED activities have now been completed.”

Early this year, AGL finalised the acquisition of a 10% stake in the gas fields feeding the pipeline project, a move that gave the company a stake in every stake of the gas project – wellhead, pipeline and retail.

But in June, Anthony said increasing labour costs and commodity prices had driven up the cost of the pipeline, to be built and owned by AGL and Petronas (50% each), to between $3.5 billion and $4 billion from an earlier estimate of $3 billion.

Anthony said at the time that AGL might bring in international partners with more pipeline experience to reduce the company’s 50% equity in the pipeline.

This morning, he said AGL believed the PNG pipeline project was now unlikely to proceed without an alternative ownership structure for the pipeline.

“However, AGL is continuing discussions with the Exxon Mobil-led upstream gas producers to explore all avenues to bring PNG gas to market while remaining a committed foundation customer for PNG gas,” he said.

"AGL is of the firm belief that PNG gas will play an important and strategic role in meeting future energy demand in eastern Australia. The company is a strong financial supporter of the development and continues to believe that eastern Australia represents the natural economic destination for these gas reserves."

Anthony said AGL's upstream gas investment was modest and the company intended to explore with its joint venture partners "all options to commercialise the gas".

AGL also has a recently acquired 50% stake in the Moranbah coal seam methane project in Queensland.

"Moranbah gas is ideally located in the Townsville-

Gladstone energy corridor and we consider its supplies could satisfy growth markets in the corridor ahead of the arrival of PNG gas as well as enhance security of supply," Anthony said.

"If the PNG Gas Project is delayed, we and our joint venture partner [operator Arrow Energy] have even more reason to prove up reserves around Moranbah."