Papua New Guinea is close to a deal with Abu Dhabi fund International Petroleum Investment Company (IPIC) to raise A$1.68 billion ($1.1 billion), through exchangeable bonds for Oil Search Limited to fund its stake in an $11 billion LNG project.

Prime Minister Sir Michael Somare said on Friday he was confident PNG would obtain the Gulf funding despite the global credit crunch and a dramatic drop in commodities prices that have made finding funds for new resource projects uncertain.

'Our financial contribution ... we have negotiated very successfully with a sovereign fund, IPIC. We are raising A$1.68 billion,' Somare told Reuters in Sydney.

'We have fixed a (exchangeable bond) rate that is agreeable by both the IPIC and ourselves,' he said, declining to give the exact price but saying that A$8 was a fair price for the bonds to be swapped for Oil Search shares.

The talks come at a time when Western firms and governments are turning to the world's top oil-exporting Gulf region for money as the global financial crisis bites. But Gulf funds that lost billions in the turmoil due to the steep slide in oil prices have become more selective with where they invest their cash, especially as they are under growing pressure to shore up tumbling domestic stock markets during the liquidity crunch.

Local PNG media reported that the IPIC deal will see PNG's state resources company, the Independent Public Business Corporation (IPBC), issue exchangeable bonds which could be transferred into Oil Search shares a price of A$8.55. Oil Search shares were down 5.8 percent at A$4.56 on Friday.

PNG holds 17.5 percent of Oil Search.

Somare said the deal would be signed next week.

Despite its resource wealth, PNG's political instability has earned it a below investment grade credit rating of B+ by Fitch. It remains dependent on foreign aid, and in September the World Bank provided a $17 million mining loan to help fund government institutions involved in mining.

Somare's son, the minister for public enterprises, confirmed the deal but said it would be 'concluded shortly'.

'I wish to confirm ... that IPBC, as the state nominee, will use its 17.56 percent equity in Oil Search to raise funds from the Abu Dhabi government-owned International Petroleum Investment Corporation based in the United Arab Emirates,' Arthur Somare said in a statement received by Reuters on Friday.

'Without going into details about the agreement, which should be concluded shortly, I would like to assure everyone concerned that the agreement we have entered into does not in any way represent a risky proposition,' he said.

'The IPBC deal has also met the NEC (PNG Cabinet) requirement that funds be raised without diluting the government's 19.4 percent equity in the (LNG) project, which is far more valuable than the holding of an indirect interest via Oil Search or any other vehicle.'

The minister said the government's adviser on the deal, Goldman Sachs, believed it was an 'excellent deal' and that it 'will not require state guarantees nor will it add to public sector debt'.

'When the deal is announced shortly, this will be a transparent transaction that every Papua New Guinean will recognise as an excellent transaction that is in the national and public interest,' said Arthur Somare.

Exxon Mobil has a 41.6 per cent interest in the LNG project. Australian-listed Oil Search holds 34.1 percent, Santos has 17.7 per cent, while Nippon Oil Corp and PNG landowners hold the rest.

Oil Search has said the project is on track for a final investment decision in late 2009, with signing of initial agreements with customers targeted by late 2008 or early 2009.-Reuters