3rd UPDATE: Oil Search: LNG Stake Sale Ended, Flags Raising

Oil Search Ltd. (OSH.AU) said Monday time constraints have forced the shock termination of a deal that would have helped it fund its share of the development of the US$15 billion Exxon Mobil-led (XOM) PNG LNG project in Papua New Guinea, due to be sanctioned in early December.

Oil Search, which will instead source A$895 million from a capital raising, had in August agreed to sell a 3.5% stake in the project to Abu Dhabi-based International Petroleum Investment Co., or IPIC, to meet its funding needs.

But it said Monday the deal wouldn't be able to be completed to meet Exxon Mobil's preferred target date.

Termination of the IPIC deal shows how determined the PNG LNG project partners are to build the project on schedule, with up to a dozen proposed Australian LNG projects competing for customers. Exxon Mobil in particular has a reputation to protect, with many analysts more bullish on PNG LNG due to the U.S. major's track record of delivering projects on time.

Oil Search's share of PNG LNG, which is targeting first gas in late 2013 or early 2014, is expected to be reduced to 28%-31% from the current 34% once the Papua New Guinean government backs into the project as planned.

Exxon Mobil wants to make a final investment decision Dec. 8 and the project's planned capacity has been expanded to produce 6.6 million metric tons of LNG a year, up from a previous 6.3 million tons, Oil Search said in a statement.

Oil Search will offer new shares at A$5.90 each to institutions, representing a 12.6% discount to their last trade of A$6.75. It also intends to launch a share purchase plan.

The termination of the IPIC deal is surprising, given the well-progressed status of the negotiations and IPIC's existing interest in the project's construction.

The deal's death, however, is unlikely to be of much concern to other PNG LNG stakeholders, including Santos Ltd. (STO.AU), with Oil Search's capital raising fully underwritten.

IPIC got involved in PNG LNG in November when it agreed to purchase the Papua New Guinean government's 17.6% stake in Oil Search as the government sought capital to fund its share of the project's development.

That deal, completed March, involved the government issuing exchangeable bonds to IPIC for its holding in Oil Search. The exchangeable bonds have a strike price - the price at which they can be converted to Oil Search shares - of A$8.55 each.

In its statement Monday, Oil Search quoted IPIC's Managing Director Khadem Al Qubaisi as saying IPIC "strongly believes in both Oil Search and the PNG LNG project" and looks forward to being Oil Search's largest shareholder upon exercise of the convertible bonds.

"There was simply not enough time for IPIC to get internal approvals in place to match the requirements of the offering timeframe," Al Qubaisi said.

Most of the funding for Oil Search's share of construction of PNG LNG is expected to be provided by export credit agencies. Oil Search said in August that negotiations with commercial banks for additional funding commenced that month and it could possibly conduct a bond issue.

Along with the Chevron Corp.-operated (CVX) Gorgon LNG project, PNG LNG is considered by analysts as a frontrunner ahead of about a dozen planned LNG projects in Australia and Papua New Guinea. Unlike some of the other proposed projects, PNG LNG had already underpinned its original full capacity of 6.3 million tons a year capacity with four separate offtake agreements - although finalization of the agreements into binding contracts remains a work in progress.

Oil Search said Monday that "there is a high degree of confidence" it will find customers for the additional 0.3 million tons a year of LNG before Dec. 8.

JPMorgan estimated in May that Oil Search could get US$500 million for selling a 3% interest in PNG LNG.

Australian integrated energy company AGL Energy Ltd. (AGK.AU) agreed to sell its PNG oil and gas assets, which included a 3.6% stake in the PNG LNG project, last October for US$800 million.

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

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