Company managing director Peter Botten said that while the study had confirmed the viability of the BG-Oil Search LNG project, the progress of the ExxonMobil-led project and uncertainties over gas resources convinced the two companies not to extend their memorandum of understanding, which expires on October 31.

BG and Oil Search had started work on the possibility of jointly developing an LNG production and export project under a MoU that was put in place in August 2006.

"BG and Oil Search have developed a very positive and constructive working relationship over the past year and have agreed to continue to explore further joint opportunities within the LNG and natural gas sector in PNG," Botten said.

Meanwhile, Botten said the new PNG Government had reiterated its support for the ExxonMobil-led LNG project and had expressed its desire to see the project proceed in a timely fashion.

"Discussions recommenced with the Government in September on progressing the development, with a commitment on both sides to finalise issues such as fiscal arrangements, to facilitate front-end engineering and design entry," he said.

"Negotiations between the various joint venture participants on unitisation and other commercial issues also advanced during the period."

He added that these activities and pre-FEED technical work were on track to be completed by year-end or early 2008, allowing the joint venture to make a FEED decision.

In September ExxonMobil and Oil Search applied to the Department of Petroleum and Energy to renew two production retention licences, PRL 11 and 12, which cover the southern portion of the Hides field and Angore.

"These licences expire in late March 2008 and discussions are now underway with the Government on the conditions of renewal," Botten said.

Botten added the entry of Chinese buyers back into the LNG market in September and other positive developments auger well for the LNG market generally, and suggest demand and pricing will remain strong for the foreseeable future.

"Assuming a positive FEED decision, marketing activities for the PNG LNG project are expected to commence in early 2008."

The ExxonMobil-led LNG project centres around a $US9-10 billion plant with either a single large train capable of producing between 5-6.5 million tonnes of LNG per annum or two smaller 3.2Mtpa trains.

In other news, Oil Search reported third quarter 2007 oil and gas production of 2.56 million barrels of oil equivalent, up 10% from the previous corresponding quarter in 2006 and 4% higher than in the second quarter of this year.

Sales revenue was up from $US177.8 million in the second quarter to $US178.4 million as higher oil prices offset a 2% drop in sales volume to 2.26 million boe.

The company added its production guidance for this year remained unchanged at between 9.5-10 million boe.

Oil Search is busy with a major strategic review, similar to that carried out in 2002, which seeks to discover how to maximise the value of the company's existing oil fields in light of a likely LNG development and how to position the company for maximum benefit from future LNG or ancillary in-country gas developments.

The review, being carried out by internal personnel and a range of specialist external consultants, will also look at ways to build production and value from the company's exploration and new venture activities in 2009-2013.

"We anticipate that initial work will be completed by the end of 2007, with conclusions and implementation of recommendations expected to commence in early 2008," Botten said.