This agreement transforms AGL – which is also a partner in the construction of the pipeline designed to carry the project’s gas – into a vertically integrated energy company.
Once the agreement is completed, AGL will have interests in the project at every stage from wellhead to retail.
AGL said it has reached a conditional gas supply agreement with the PNG Gas Project producers to purchase about 1,500 petajoules of gas over 20 years from 2009 for $4.5 billion.
It has also reached a conditional agreement with PNG Gas Project operator Oil Search Ltd to take a 10% upstream equity interest for $US300 million.
Both projects are subject to conditions, including the PNG Gas Project reaching financial close. A final investment decision from the Papua New Guinea producers is expected in the second half of 2006.
“The transaction is consistent with our strategy of being Australia’s leading integrated energy company," AGL managing director Greg Martin said.
"It sees us not only committing to the next tranche of gas for our supply portfolio, but also becoming more directly involved in the upstream end of the energy value chain."
"We’re looking to become more involved in upstream sectors of the value chain that complement and support our need to supply competitively priced gas and electricity to our retail customer base.
"This investment is in keeping with our strategy of having more control over our wholesale energy costs and maintaining our competitiveness in supplying over 3 million customers in the south-eastern Australian energy market."
Martin emphasised that AGL was investing in proven and probable, or 2P, reserves - not making an investment in an upstream exploration play.
Martin said the gas supply agreement secured around 1500 PJ of competitively priced gas to meet future customer demand in NSW, ACT and South Australia, as well as underpinning AGL's participation in the fast-growing Queensland energy market.
"Part of AGL's integration strategy is to create value through equity investments in upstream gas reserves at attractive entry prices," he said.
"The investment parameters agreed with Oil Search for the equity purchase will result in earnings per share accretion from day one."
The agreements complemented AGL's existing commitment to build the Australian component of the PNG gas pipeline, including a proposed extension to Gove in the Northern Territory, according to Martin.
"There is now greater certainty for the pipeline project for which AGL is the preferred developer in partnership with Malaysian company Petronas," he said.
"These transactions secure competitively priced, flexible wholesale gas supplies, an attractive equity investment in the upstream PNG Gas Project and provide additional infrastructure certainty."
Following the completion of this transaction, interests in the PNG Gas Project will be: PNG Gas project participants include Oil Search (operator) 44.2%, Exxon Mobil 39.4%, AGL 10%, MRDC-PNG Government 3% and Nippon Oil 3.4%.
It is believed that Oil Search is still in talks to bring Santos into the upstream development.