Sydney (Platts)--14Aug2012/237 am EDT/637 GMT

InterOil's planned Gulf LNG project in Papua New Guinea appears to have been thrown a life-line, with newly reappointed Minister for Petroleum and Energy William Duma indicating he stands ready to work with the company to progress the proposal.

"I remain optimistic," Duma said Tuesday in response to inquiries from Platts about the project's prospects.

Duma's position marks a considerable softening of his stance in May, when he set a 180-day trigger for the termination of InterOil's 2009 project agreement with the PNG government.

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Duma was again named at the head of PNG's petroleum and energy portfolio in the recently elected government of Prime Minister Peter O'Neill, who unveiled his cabinet earlier this month.

"We would like to meet with InterOil first to discuss the issues, before we do anything further, and see if we can reach a common understanding," Duma said. "We are always fair to our investors."

Duma earlier put InterOil and its project vehicle Liquid Niugini Gas Limited on notice, after repeatedly issuing public statements that the proposal for the Gulf LNG project had been rejected by cabinet, known as the National Executive Council.

The 2009 agreement called for the delivery of a 7.6 million-10.2 million mt/year LNG project based on InterOil's Elk and Antelope gas reserves, using internationally recognized technology and operators with experience at similar-sized assets. Instead, the company had proposed a phased development with itself as the upstream operator.

"InterOil has for too long insisted on a development structure which is designed to only meet its objectives of controlling the asset and the pace of developing it," Duma said in May. "This has led to a proposal calling for a piecemeal, incremental and fractured development implementation operated by InterOil and its affiliates, rather than by large-scale international operators with experience and capital."

InterOil "accepts that" the project must have an internationally recognized and experienced operator, the minister said Tuesday. "We want to help them talk to the majors. They [InterOil] have been in the country a long time and we don't want to put them under pressure. We want to work with them," he added.

Duma has previously called for InterOil to sell a minimum 50.5% stake in the Elk/Antelope field to a major international petroleum company with experience operating world-scale LNG plants. Which company comes on board, however, would be a commercial matter for InterOil to decide, he added.

PNG media has reported in the past that US major Chevron was interested in partnering InterOil in the LNG project, and Duma has repeatedly pointed to Shell as a potential stakeholder. Shell signed a strategic alliance with PNG state-owned Petromin last August and is actively pursuing LNG opportunities through a Port Moresby office opened in February this year.

"We welcome the pleasure to work with both returning and new ministers of the ninth parliament of PNG to bring an LNG processing facility to PNG of a nature and in a manner which will be satisfactory to the state and to the mutual benefit of all stakeholders," InterOil Chief Executive Officer Phil Mulacek said Tuesday in the company's report for the second quarter. He added that the process to find a partner for the LNG project was ongoing.

"With the sound backing of the new administration in PNG, we are continuing to work with our advisors to finalize selection of an LNG equity partner," Mulacek said. "The end result of the partnering process is expected to fully satisfy all the terms of the 2009 LNG project agreement."

As the Gulf LNG project plans currently stand, InterOil would act as the upstream field operator. In August 2010, InterOil and Japan's Mitsui agreed to develop a $550 million liquids stripping project at the Elk and Antelope fields that would be a precursor to the LNG development.

In February 2011, InterOil signed an agreement with Australia-based Energy World Corporation for a modular LNG plant to be developed in the Gulf province in two phases, the first of 2 million mt/year, with a later expansion of 1 million mt/year. The agreement provided for a possible expansion up to 8 million mt/year.

The Gulf LNG project would be PNG's second. US giant ExxonMobil is currently constructing a $15.7 billion LNG project which is on track to start up in 2014 from two production trains with total capacity of 6.6 million mt/year.

Meanwhile, InterOil posted a net loss of $31.7 million for the quarter ended June 30, 2012, compared with a net profit of $23.5 million for the same period in 2011. The company, which operates PNG's sole 36,000 b/d oil refinery, attributed the loss to a $23.8 million inventory write-down due to the decline in crude oil and related commodity prices during the period.

--Christine Forster, christine_forster@platts.com --Edited by Haripriya Banerjee, haripriya_banerjee@platts.com

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