UPDATE: Exxon Progresses PNG Expansion Plans

Exploration drilling that could support an expansion of ExxonMobil Corp.'s (XOM) US$15 billion gas export venture in Papua New Guinea will start before the end of the year, project partner Oil Search Ltd. (OSH.AU) said Tuesday.

An expansion of the massive development to three liquefied natural gas, or LNG, production units from the currently planned two would enhance Exxon and its partner's ability to provide cleaner-burning fuel to fast-developing Asian economies such as China. It could also provide more gas to Japan, whose longer term energy needs may change in the wake of March's nuclear power crisis.

Major energy companies including Exxon, Royal Dutch Shell PLC (RDSB) and Chevron Corp. (CVX) are betting on sustained long-term demand for natural gas from Asia by investing billions of dollars on export terminals in Australia and Papua New Guinea that would chill gas to LNG and ship it to customers by tanker.

Drilling of the Hides gas field in the PNG highlands, which could support a bigger development, will commence in the fourth quarter of 2011, Oil Search said. That's in line with a proposed accelerated drilling timetable that the joint venture has been considering all year.

Oil Search has also brought forward drilling of a test well in the P'nyang field using one of its own rigs to the fourth quarter of 2011 from the first quarter of 2012.

Separately, the Australian company said PNG LNG's foundation stage is on schedule, with Exxon advising that "it is making good progress towards the planned start-up window of 2014".

That's significant because mounting industry cost pressures are making life tougher for project operators. Woodside Petroleum Ltd. (WPL.AU) recently announced a six-month delay and A$900 million budget overrun for its Australian Pluto LNG project.

To be sure, PNG LNG is in a much earlier stage of its development and the true test will come as it works through its peak construction phase.

There will also be challenges associated with building a pipeline across PNG's rugged jungles and keeping multiple landowner groups onside. Analysts though like PNG LNG because it has a robust resource base, good fiscal terms and it's backed by an experienced operator.

"We think PNG LNG is the best placed Australasian LNG project to withstand a potential capex increase/project delay," UBS said Monday.

Oil Search said a focus at the moment remains the high Australian dollar, given that the project has a number of Australian dollar-denominated contracts and some staff based in Brisbane. Exxon is managing the issue by using more North American workers, an Oil Search spokeswoman said.

-By Ross Kelly, Dow Jones Newswires; 61-2-8272-4692; ross.kelly@dowjones.com

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