UPDATE: Oil Search Says PNG LNG Has Major Asian Customer

The Exxon Mobil-led liquefied natural gas joint venture in Papua New Guinea has made an offtake pact with an unnamed Asian customer, cementing its frontrunner status among a dozen competing LNG hopefuls in the region.

Project participant Oil Search Ltd. (OSH.AU) said Tuesday that a "major Asian customer" has agreed to buy two million tons of LNG each year from PNG LNG, with completion of a formal heads of agreement pending government regulatory approval. Other customer negotiations are progressing well, with more agreements expected to be signed "in the near term", said Oil Search, which owns 34% of the project.

"This has given the project increased confidence that the full 6.3 million metric tons per annum capacity will be contracted by mid-year," the company said in a statement.

By 0443 GMT, Oil Search shares had fallen 0.6% to A$5.11, but were outperforming the energy sector with Woodside Petroleum Ltd. (WPL.AU) falling 3.5% and Santos Ltd. (STO.AU) down 4.2% after Nymex crude plunged 8.8% overnight to US$45.88 a barrel.

An energy analyst at a large international investment bank said the deal was a pivotal milestone for Oil Search and expressed surprise that the company's shares had fallen at all.

"It's a slam dunk," the analyst, who declined to be identified, said.

"The key terms are done, they've just got to get approval from the purchaser's government."

Some investors were nervous that a current slump in global energy demand would destabilize customer negotiations, but the contract win is a sign that LNG deals can still be struck on terms favorable to both buyers and sellers.

It will also make it easier for Exxon Mobil Corp. (XOM), Oil Search and smaller PNG LNG project participants like Santos to find more customers, now that an indicative price for deals has been hammered out.

PNG LNG got a "competitive price" from the deal, according to Oil Search's chief executive, Peter Botten, who acknowledged that current sluggish global economic conditions are making buyers more cautious.

But he added that potential customers are "much, much more cautious" when dealing with projects that aren't in the "upper echelon".

"The market is more cautious, but frankly they're looking for quality - the quality of the resource and the quality of the operator," he told Dow Jones Newswires by phone from Port Moresby.

"And they have more choice now than they had 12 months ago."

"The customers we're talking to are quality customers with proven ability to utilize the LNG and we're very comfortable with where we sit right now."

Botten said government regulatory approval on the deal could be forthcoming "reasonably quickly".

"At this stage, we don't think it's a long process but it's not in our control," he said.

Oil Search on Tuesday also reported a steep, 59% on-year drop in first-quarter revenue for the three months to March 31 to US$71.4 million, mostly due to a lower oil price.

The fall in revenue was also caused by lower-than-expected production owing to a 10-day mechanical disruption at a loading facility at the Kutubu field, Botten said.

"That'll unwind itself as the year progresses and we should be pretty well square between production and sales by the end of the year," he said.

Oil Search stuck to its guidance of producing 8.0 million-8.3 million barrels of oil equivalent in 2009 after it produced 1.9 million BOE in the first quarter.

On dividends, Botten said that Oil Search will make a decision on its interim dividend when the board looks at its first-half earnings results. "Clearly, oil prices are down and you have to factor our capital usage into the picture as well," Botten said.

"As we move forward with PNG LNG, a substantial amount of our very strong balance sheet will be utilized to support the project."

In August 2008, Oil Search declared an interim dividend of four U.S. cents per share. At March 31, it had US$481 million cash.

-By Ross Kelly, Dow Jones Newswires; 61-2-8235-2957; ross.kelly@dowjones.com

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