"The large funding requirements of the LNG project mean that funds available for other activities will be closely controlled, in what is a highly competitive capital-constrained environment," Oil Search chairman Brian Horwood told shareholders at the company's annual general meeting in Port Moresby on Friday.

Horwood said a strategic review designed to set a strategy for the next five years had identified a range of cost-cutting measures.

These included a reduction in the company's Middle Eastern and North Africa (MENA) activities.

"A number of the MENA licences were not material in the context of a growing gas portfolio," he said.

"The recommendation was to rationalise the portfolio to realise cash and reduce future capital commitments, and to refocus on assets with higher levels of materiality. In line with this, we recently announced the sale of a package of MENA assets to Kuwait Energy for $US200 million plus working capital."

The company also plans to reduce its exploration budget. Last year saw Oil Search's biggest ever exploration campaign with more than 20 exploration wells drilled, mostly in the Middle East and North Africa. But its success rate was only 20% - substantially below internal targets.

"The exploration budget for 2008 is considerably lower than in 2007, with a focus on prioritisation of targets, optimising our equity positions and reducing risk," Horwood said.

Horwood also said the company must continue to optimise production from its ageing fields.

"While many of the ways to stem the decline rates in production have already been captured, there still remain further opportunities to optimise output," he said.

"Our intention is to aggressively pursue these opportunities in a cost-effective manner. This will require an improvement in our drilling performance and ensuring our cost base is appropriate."

Horwood acknowledged that in recent years Oil Search had fallen short of achieving its production targets, and said efforts were being made to improve the accuracy of forecasting.

These measures would help the company address the challenges presented by the PNG LNG project, he said.

Joint venture partner ExxonMobil's recent agreement with the PNG Government over fiscal terms for the LNG scheme had produced a fair split of the expected future cash flows from the project, according to Horwood.

"They provide an appropriate risk-return balance for its proponents, while guaranteeing Papua New Guinea receives a substantial share of revenue generated by the project, with the added benefit of sharing in future increases in oil and gas prices," he said.

Horwood also reiterated the results of a report by independent consultant ACIL Tasman that indicated PNG LNG could double the nation's GDP. It is estimated that 7500 jobs will be created during its initial construction phase, with around 800 to 900 jobs maintained during production operations.

In occupational health and safety, Oil Search's total recordable incidents declined for the third year in a row.