"We are very pleased to have reached this stage with two such prominent LNG players, bringing PNG's entry to the world LNG stage a step closer," said Liquid Niugini chief executive Jack Hamilton.

"Once we have reached an acceptable commercial agreement, Liquid Niugini Gas will award the FEED contract with an agreed EPC contract as an option, which shaves around twelve months from the traditional timeframe for such projects."

Hamiton added this would allow the LNG project to meet its 2012 first production target.

The final FEED decision is expected later this year and depends on appraised gas supply from Liquid Niugini shareholder InterOil and finalising a project agreement with the PNG Government.

Liquid Niugini's two-train LNG plant, expected to produce up to 9 million tonnes of LNG a year from 2012, will be near InterOil's Napa Napa refinery.

InterOil, Merrill Lynch and Clarion Finance had last week finalised the shareholder agreement for the LNG project that included provisions for the entry of strategic partners to provide additional expertise and capital, and allowance for including the PNG Government as a partner in the project.

Each partner will own a one-third stake in PNG LNG, a holding company for Liquid Niugini.

Merrill Lynch has also committed to buying 100% of the LNG output for the life of the project.