article in the afr today

Oil Search's diversity reduces reliance on pipeline
Mar 7
Ian Howarth

The importance of the $1.5 billion PNG-to-Australia gas pipeline to the future of Oil Search is receding as the company works on a string of other strategies to commercialise its large gas reserves.

Now a much bigger company after the merger with Orogen Minerals and with sharply higher oil production, Oil Search has the muscle to pursue other options.

Its balance sheet is strong and gaining ground daily as $US40 ($65) a barrel crude oil and high gold prices swell its coffers and help cut its already low debt load.

In revealing its massive first-half profit of $33.66 million this week, Oil Search also revealed a surprise US1¢ a share dividend and unveiled a share buyback program for up to 10 per cent of its stock.

That, combined with strong crude oil production growth in the next few years, is likely to see Oil Search consolidate its place among the top end of Australia's mid-ranked petroleum groups.

The PNG-to-Australia gas pipeline project now represents just one growth option, rather than appearing as the company's only option as it had done over recent years.

Deutsche Bank analyst, John Hirjee, agrees. He wrote yesterday: "Continued emphasis will be placed on bringing the PNG -to-Australia pipeline project to commercial reality."

But he added that Oil Search will also, "pursue other [gas] development options ... including liquid stripping, compressed natural gas, methanol developments and other gas based industries in PNG."

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The original PNG-to-Australia pipeline project would have been well into the final engineering design phase by now if AGL Ltd had not walked away from the project last year and signed gas contracts with other suppliers. But while AGL's defection was a "setback" it was not fatal for the project.

Project partners Oil Search and Exxon Mobil are investigating three options for the pipeline route and Oil Search's chief executive, Peter Botten, believes the project will enter the front end engineering and design (FEED) phase before the end of the year.

One proposed route brings the pipeline into the Gulf of Carpentaria before branching off to the Northern Territory and Mt Isa, while a second route travels to the territory, Mt Isa and then on to the Moomba gas hub in South Australia.

A third option, dependent on winning Queensland gas customers, travels overland through Queensland and on to Moomba and possibly the south-eastern states.

Mr Botten said Exxon Mobil had identified potential gas demand in south-east Australia equivalent to 300 petajoules of gas a year, easily enough to justify the construction of the pipeline.

To proceed to the FEED stage the PNG gas pipeline project needs between 100 to 150 Pj of contracted gas demand a year.

Mr Botten has also confirmed that Oil Search is planning to sell its equity stake in the Porger and Misima gold mines.

"We are not the natural owners of those assets," Mr Botten said.

He also hopes to dramatically reduce operating costs at the PNG oil operations, possibly by acquiring the operation of the fields, now operated by Chevron Inc of the US.