SINGAPORE, Oct 4 Energy minnow MEO Australia will begin a drilling campaign in the Timor

SINGAPORE, Oct 4 (Reuters) Energy minnow MEO Australia will begin a drilling campaign in the Timor Sea next week that could pave the way for the world's first offshore liquefied natural gas (LNG) plant, a company official said on Thursday.

MEO, a gas explorer focused on developing reserves with high carbon dioxide content, hopes to prove up enough gas to begin preliminary design work early next year and make a final decision on the estimated $3 billion project by end-2008, managing director Chris Hart told Reuters.

The 3 million tonnes per year (tpy) capacity project would be the world's first offshore liquefaction plant, located 275 km (170 miles) north of Darwin, offering lower development costs and sidestepping environmental restrictions that threatened to snare other LNG projects in Australia.

''We're avoiding Australian construction costs, that is a 30-40 percent saving, and by our location adjacent to the gas fields we're avoiding pipelines to shore which, would add in the order of US$1 billion to the overall capex,'' Hart said in an interview.

The West Atlas jack-up drilling rig is due next week to spud the first of two wells in MEO's NT/P68 exploration permit in the Australian waters of the Timor Sea to appraise gas reserves, some of which were first discovered and abandoned over 30 years ago.

''The estimated contingent resource for high quality gas for LNG production and lower-quality, high carbon dioxide gas for methanol is 11 trillion cubic feet (tcf),'' he said.

Analysts estimate that proven reserves of only 2-3 tcf could make the development commercially viable.

The large content of carbon dioxide found in Timor Sea gas has until recently deterred developers due to the high costs involved, but higher LNG prices now make it feasible. Long-term LNG deals were agreed at as low as $3 per million British thermal units five years ago, but are now treble that.

BIGGER FIRMS ENLISTED The LNG plant will be built alongside a facility to produce methanol, primarily used as a chemical intermediate or feedstock but also finding some favour as a fuel additive.

MEO, with a market capitalisation of A$345 million (US$304) has enlisted larger companies to assist with the development.

Air Products and Chemicals, which holds a share in the methanol complex, and Petrofac Energy Developments (Petrofac), which has a stake in the upstream block, will help with finance, said John Robert, Development Engineering Manager.

MEO expects to sell stakes to LNG and methanol customers in South Korea and Japan, and is also in talks with a European energy trading company, Robert said.

Hart said the first methanol plant will cost about $900 million, the LNG plant around $1.4 billion and upstream capital expenditure in excess of $1 billion.

It hopes production can begin by 2011-2012, a quick start given delays facing other big LNG projects such as Gorgon run by Chevron, with partners Exxon Mobil and Royal Dutch Shell, which analysts expect to deliver first gas in 2015-2016.

Robert said MEO had not decided who to award the front-end engineering and design (FEED) contract to, although Aker Kvaerner and WorleyParson have provided some services.

''In terms of EPC (engineering, construction and procurement), we have spoken with various parties, Leightons, John Holland, Technip, Chicago Bridge&Iron and Fluor,'' he added.

The entire plant will be built and pre-commissioned in Southeast Asia before being towed to site offshore Australia.

But given the scale of the project, the methanol and LNG plants will most likely be built in separate locations.

The methanol plant needs to be built by a workforce with petrochemical industry experience, most likely in a yard in Thailand or Batam island, Indonesia.

''We are working with Arup Energy, the designer of the gravity-based structures to source a suitable fabrication yard in Asia,'' said Hart.

MEO shares fell 3.7 percent on Thursday, but have jumped 27 percent since mid-August.

REUTERS KR DS1506