(Bloomberg) -- Oil Search Ltd. said $600 million of spending on preparations for a Papua New Guinea liquefied natural gas venture before a final decision on its construction is a vote of confidence for the Exxon Mobil Corp.-led project.

Talks with banks on project financing will start this month, after key terms were agreed with export credit agencies late in the second quarter, Oil Search said in a statement today. The company may sell a stake in the venture should funding needs require it to do so, it said later.

Exxon and its partners, which include Santos Ltd. remain “on track” to decide on the $12.5 billion project by the end of this year, with final capital costs known late in the third quarter, Oil Search said. Net cash dropped to $402.1 million in the second-quarter, down 16 percent from three months earlier, after spending on the Papua New Guinea project, exploration and developing wells, Port Moresby-based Oil Search said.

“Cash is eroding at a concerning rate given the deadline for Oil Search’s equity contribution for PNG LNG is looming,” Morgan Stanley analysts led by Melbourne-based Stuart Baker said in a note to clients today. “The likelihood of additional capital requirements is increasing in our view.”

Oil Search would consider selling a stake in the Papua New Guinea venture, spokesman Austin Miller, said from Sydney today. A capital raising isn’t the company’s preferred option should the need arise, he said. Oil Search has no debt, it said in its statement.

LNG Sales Talks

Oil Search, up 20 percent since the start of the year, dropped 0.4 percent to close at A$5.58 in Sydney after gaining as much as 2 percent. The benchmark ASX 200 Index was little changed.

Papua New Guinea’s largest private sector investment will target demand for cleaner-burning fuels from utilities in North Asia. The $600 million early works program “will enable full construction to commence in early 2010 and helps protect the project delivery schedule,” Managing Director Peter Botten said in the statement, filed to the Australian stock exchange. The first LNG sales are due in late 2013 or early 2014.

Talks have started to supply LNG from Papua New Guinea to Tokyo Electric Power Co. and Osaka Gas Co., while China Petroleum & Chemical Corp. is a potential customer, Exxon said June 22. Taiwan’s CPC Corp. said June 23 it may buy gas from the venture. The project will have a capacity to produce 6.3 million metric tons of the fuel a year.

Sales Drop

Second-quarter sales dropped 60 percent to $116.6 million, after a decline in volumes and a slump in prices, Oil Search said today. It sold crude oil for an average of $55.57 a barrel in the three months ended June 30, down from $133.23 a year earlier.

Production slid 10 percent to 1.91 million barrels of oil equivalent. Oil Search last year sold stakes in ventures in the Middle East and Africa, reducing output.

Revenue from operations, which excludes drill rig lease income and refined product sales, fell to $107.7 million. This compares with the $120.6 million estimate by JPMorgan Chase & Co. in a July 20 note to clients.

The forecast for full-year output remains unchanged at 8 million to 8.3 million barrels of oil equivalent, Oil Search said.

LNG is natural gas that has been chilled to liquid form, reducing it to one-six-hundredth of its original volume at minus 161 degrees Celsius (minus 259 Fahrenheit), for transportation by ship to destinations not connected by pipeline.