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SYDNEY, Australia (January 9, 2002 - Asia Times/Asia Pulse)---Australia's Santos Ltd. has quit the proposed US$ 3 billion project to build a gas pipeline between Papua New Guinea and the state of Queensland after a dispute over commercial terms for the partnership. The long-delayed project's operators, however, still believe the pipeline will go ahead.

Santos said that it may yet return to take equity in the project but had pulled out because it was unhappy with the terms of a new agreement, which did not require all partners to agree to commercial decisions. Santos holds a 31 percent interest in the Hides gas field in Papua New Guinea that was expected to be a major source of gas for the project.

Project operator Exxon Mobil Corp said that the proposal will continue under a new heads of agreement, which it said provides more flexibility. Exxon said that the new agreement will accelerate the project toward the engineering stage, with Santos' 12.5 percent stake to be distributed among the other players.

"The new agreement means minor project participants can't prevent the overwhelming majority of participants moving forward with commercial negotiations," Exxon spokesman Chris Welberry said. "So it's a positive step in assisting us in negotiating gas sales agreements."

The Papua New Guinea gas proposal has been plagued by the Papua New Guinea government's inability to raise funds for an expected one-third share in the project, as well as the slow uptake of gas sales agreements with customers in Queensland. Before the redistribution of the Santos holding -- which is still being negotiated -- Exxon held a 31 percent interest in the project, with smaller stakes held by Oil Search, Orogen, Chevron Texaco, Japan Petroleum Papua New Guinea and Papua New Guinea's Mineral Resources Development Corp.

However, Santos said that it still hoped to be part of the project. "Santos remains committed to the development of the Papua New Guinea Gas Project, but it must first be satisfied with the commercial foundations on which the project would be based," Santos managing director John Ellice-Flint said.

Santos already owns a well-established gas supply business within Queensland, which could potentially be threatened by the plan to lay a seabed pipeline from Papua New Guinea's oil and gas fields across the Gulf of Papua to Gladstone in Queensland.

Santos spokesman Graeme Bethune said that the company indirectly owned 12 percent of the gas earmarked for the Papua New Guinea gas project. He said that Santos is keen to take back equity in the project, but would not agree to the new terms, which came into effect on January 1. "The terms were acceptable prior to December 31," Bethune said. "They are going to need some resolution with Santos about the gas that they don't own."

Exxon's Welberry said that Santos' decision will not affect the proposal, but said that the group has yet to finalize the Papua New Guinea government's plan to take a stake in the project. "We'd like to see them take a significant interest in the project. How they finance that is really a matter for the government. But we're encouraged by the progress that's been made in that regard," Welberry said. He said that recent major infrastructure projects announced in Queensland have given the operators greater certainty in assessing the potential size of the market.

The restructuring of the project's ownership came as major players Orogen and Oil Search discussed a possible merger. It is speculated that Oil Search could offer 1.15 of its shares plus 35 cents cash for every Orogen share. If the merger is successful, the Papua New Guinea-based company would effectively control the proposed development of the pipeline.

The Papua New Guinea government-owned Mineral Resources Development Corp, 51 percent owner of Orogen, may see such a merger as an opportunity to bail out of the stock after its holding was diluted to about 18 percent of the merged company. The Papua New Guinea government is desperately in need of cash that would be accessible through a sale of its stake.

For additional reports from the Asia Times, go to PACIFIC ISLANDS REPORT News/Information Links: Newspapers/Asia Times Online: Oceania.

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