But first the Port Moresby-based, ASX-listed company will have to pay up to $US55 million for its share of front-end engineering and design and other upfront costs, as well as another $US601 million for capital expenditure, managing director Peter Botten told reporters in Papua New Guinea last week.
The company is in the final stages of choosing a bank to advise on financing its share of initial pipeline project costs, Botten said.
"Once the infrastructure is in place and stable, Oil Search would likely spin its share of the asset into a dedicated infrastructure company," he said.
"There is lot of appetite in the market right now for fixed return type vehicles.”
Pipeline trusts are becoming popular with investors. AMP and Macquarie recently set up the Diversified Utilities Energy Trust, which forecasts a yield of about 9.5% over 20 years. Westpac also set up a similar fund, selling $379 million of shares last month in a trust that is scheduled to start trading this month.
A trust structure would maximise Oil Search’s leverage on its strong balance sheet, allowing it to undertake other projects using its share of PNG gas.
The PNG venture has so far reached conditional agreements for the sale of between 58 and 120 petajoules a year of gas.
For the project to be approved, it would need commitments for purchases of about 150PJ a year within five years, Oil Search said in October. The partners have said they expect an additional 70PJ to be confirmed by the end of 2005.
The partners last month signed a separate agreement with an Australian Gas Light Co and Petroliam Nasional Bhd consortium, which will design and build Australian end of the pipeline for a cost of at least $1 billion. The PNG end of the project will cost about $1.28 billion.
Oil Search currently has a 54.2% stake in the PNG gas pipeline project, but would reduce to 47.2% if the government and Santos Ltd exercised their rights to buy in. The other major participant and project operator, Houston-based ExxonMobil, currently has 39.4% reducing to 25.7%.
Meanwhile, delays in the PNG pipeline project have made Oil Search look for ways to develop its PNG gas reserves and the company and two Japanese partners are considering start engineering work as early as next month on a $500 million chemical plant near Port Moresby.
The project – in partnership with Japan's Itochu Corp and Mitsubishi Gas Chemical Co – would use gas from Oil Search’s PNG fields to produce methanol and dimethyl ether, used as a clean substitute for diesel, for sale to Japan and possibly China.
Several Japanese energy users were considering importing DME starting in 2008 or 2009 and negotiation with Japanese buyers on supply contracts were making progress, according to Botten.
“We are in discussions with the Japanese about supply contracts and the terms of those supplies, and are looking at [engineering design] decisions sometime late this year or early next,” he said.
Oil Search, Itochu and EnerSea Transport LLC have also studied the possibility of shipping compressed natural gas from PNG to New Zealand and the results were “attractive”, according to Botten.
Importing CNG into New Zealand to meet a gas shortage predicted to start about 2009 would involve a capital cost of about $400 million, compared with at least $500 million to import liquefied natural gas, he said.
