3rd UPDATE: PNG LNG Project To Proceed Pending Sales, Funding

Exxon Mobil Corp. (XOM) and its partners Tuesday agreed to proceed with a US$15 billion liquefied natural gas project in Papua New Guinea, despite extending a deadline to wrap up financing.

The PNG LNG project partners also said approval of the project is conditional on clinching binding sales agreements with two more Asian customers. The offtake deals, along with the outstanding financing, are expected to be completed by "early 2010", Exxon Mobil said.

Another project equity holder, Oil Search Ltd. (OSH.AU), had said in October that all four of the project's planned sales agreements were expected to be finalized in the fourth quarter, "prior to the final investment decision".

The project partners had previously indicated that they expected to make a final investment decision Tuesday. Exxon Mobil's latest announcement shows the project is making progress, but some investors could be disappointed that all outstanding offtake and funding arrangements haven't been wrapped up yet.

"Pending completion of these sales and financing arrangements, significant project activity will commence in 2010," the head of Exxon Mobil subsidiary Esso Highlands, Peter Graham, said in a statement.

The project, which will have the capacity to produce 6.6 million tons of LNG a year, is the biggest resources development undertaken in Papua New Guinea and has the potential to transform the developing nation's economy by doubling its gross domestic product.

It is one of over a dozen LNG terminals planned for construction in Papua New Guinea and Australia designed to tap an expected surge in demand for cleaner-burning fuels from fast-growing Asian economies nearby.

PNG LNG has signed binding agreements for the sale of a combined 3.8 million tons per annum of LNG to China Petroleum & Chemical Corp., known as Sinopec, and Tokyo Electric Power Co. (9501.TO), or Tepco.

Preliminary agreements with Osaka Gas Co. (9532.TO) and Taiwan's state-owned refiner CPC Corp. have yet to be finalized into binding contracts.

CPC Chairman Chu Shao-hua said Nov. 10 that the company doesn't plan to sign any new LNG procurement deals this year because local demand remains weak.

Osaka Gas said Tuesday that it is still in talks over buying gas from PNG LNG, but wouldn't comment further.

Exxon Mobil said that the Papua New Guinean government has backed into the project through the acquisition of a 16.6% stake. That means Exxon Mobil now has 33.2%, Oil Search 29.0%, Santos Ltd. (STO.AU) 13.5%, Nippon Oil 4.7%, PNG landowners 2.8% and Petromin PNG Holdings Ltd. 0.2%.

Along with the Chevron Corp.-operated (CVX) Gorgon LNG project in Australia, PNG LNG is considered by analysts as a frontrunner ahead of around a dozen rival developments in the Australasian region that are competing for labor, customers and funding.

Gorgon was sanctioned by Chevron Corp. (CVX), Exxon Mobil and Royal Dutch Shell PLC (RDSB.LN) in September, making it the first Australian LNG project sanctioned since Woodside Petroleum Ltd.'s (WPL.AU) Pluto LNG project got the go ahead in July 2007. First gas from Pluto is expected in early 2011.

Exxon Mobil's indication that it plans to commence major construction work on PNG LNG next year will exacerbate concerns about labor shortages for rival projects planning on making final investment decision in 2010 and 2011.

In an ominous sign, Woodside last month forecast a cost increase at Pluto of up to A$1.1 billion partly due to a shortage of skilled trades like drillers and welders.

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

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