Papua New Guinea’s oil and gas infrastructure. (Maplecroft/Interfax)

Texas-based InterOil is confident of finding an operator for its Gulf LNG project by the end of June and, as a result, resolving a disagreement with the Papua New Guinea Department of Petroleum and Energy (DPE) that led to the agency’s move to annul the project agreement, Wayne Andrews, InterOil’s vice president of capital markets, told Interfax on Tuesday.

“As far as I know, if we bring in a partner that the government wants to work with, we will resolve this long before the six-month consultation period is up,” Andrews said. “This is the only issue for the government, and we think we’ll get it done this quarter.”

InterOil announced on Monday that it had received – through “an unofficial channel” – a copy of the DPE’s notice of intent to cancel the LNG project agreement signed with subsidiary Liquid Niugini Gas in 2009. The notice triggers a six-month consultation period to discuss the disagreement.

The move, which followed several months of wrangling over the project’s design as well as the government’s need for a high-profile LNG operator, was seen as an attempt to strong-arm the company into sticking to the original agreement, analysts told Interfax on Tuesday. However, it could also impede the company’s efforts to lure the right partner, they added.

“Having considered the issue carefully with our external advisers, we are strongly of the view that the state has no right at present to terminate the project agreement,” InterOil said in the statement.

Petroleum and Energy Minister William Duma responded by clarifying that the government has not formally terminated the project, according to Dow Jones. “The PNG government has been concerned for a while in relation to the apparent inability of our partners, InterOil and Liquid Niugini Gas, to secure an internationally reputable operator to operate the LNG project and in relation to the apparent deviation from the project specifications despite our repeated reminders,” Duma said.

Project disagreements

The news is not entirely surprising, given the DPE’s reported objections to InterOil’s attempts to modify the terms of the project agreement, analysts agreed.

Still, the timing of DPE’s notice is “certainly provocative”, particularly given that it comes less than a week after ex-Prime Minister Michael Somare said he would not run for re-election this summer, said Giulia Zino, an Asia analyst at Maplecroft.

“With Somare out of the picture and [Prime Minister] Peter O’Neill looking to legitimise his rule by popular vote, investors may perceive the setback as evidence that InterOil has lost support in Port Moresby, despite company claims that the project still enjoys backing across the political spectrum,” she said.

InterOil would like to start with a liquefaction capacity of 5 million tons per annum (mtpa) and grow from there, rather than the originally slated 7.4-10.4 mtpa, and wants to put one plant offshore.

“The modification of the project concept by Liquid Niugini Gas has caused tension with PNG’s DPE,” Thomas Grieder, an Asia Pacific analyst for IHS World Markets Energy, told Interfax on Friday. A larger liquefaction plant would provide the government with higher LNG export revenues.

Andrews, however, said InterOil would be willing to compromise. “We may end up building two big onshore plants, like everyone else, instead of a smaller floating one.”

A series of setbacks

Meanwhile, InterOil and its Gulf LNG partners – Mitsui, Energy World Corp., Flex LNG and Samsung Heavy Industries – missed the deadline for reaching a final investment decision by the end of 2011, and then the new target of 31 March.

Still, the company has remained optimistic about striking a partnership deal. One of the most prominent potential partners is the Far East Consortium, which includes Mitsui, Japan Petroleum Exploration and Kogas.

Grieder agreed that the company does not seem to be struggling. “While oil and gas companies appear interested in taking stakes in the Gulf LNG project, the minister of petroleum and energy appears to have his own preference in terms of who to select as an international project partner.”

However, the DPE’s notice of intent to cancel may get in the way of the negotiations, said Zino. “Indication that the project may be cancelled will likely make it even more challenging for InterOil to select the internationally recognised LNG operator to partner in developing Gulf LNG.”