Global giants ExxonMobil and BHP Billiton will spend $1 billion upgrading the Longford gas plant in Victoria in a project that will create about 250 construction jobs.
The 43-year-old plant supplies most of Victoria's gas, while also supplying to NSW and Tasmania and providing 20 per cent of Australia's crude oil needs.
ExxonMobil-owned Esso Australia operates the plant and will provide $500 million in the project and BHP's share is $US520 million ($A494.88 million), pending regulatory approval.
A new gas conditioning plant will remove carbon dioxide in natural gas from the companies' now $5.5 billion-plus Kipper Tuna Turrum project in Bass Strait, the largest on the east coast.
Gas from Turrum contains higher levels of carbon dioxide than past gas from Bass Strait, forcing the revamp at Longford which treats all of the oil and gas from the area.
The 400 million cubic feet of gas a day plant will reduce the CO2 content to an acceptable less than three per cent to meet gas quality specifications for sale into the market.
Turrum has been hit by cost blow-outs and delays, with high mercury levels found in the gas, forcing extra engineering work.
Production is due to start in 2016 after originally being set for last year, with construction at Longford starting in the third quarter of next year.
Australia's suite of costly natural gas projects has been beset by problems and Thursday's announcement follows BHP selling its minority stake in the $30 billion Browse gas project to PetroChina for $US1.63 billion ($A1.56 billion) on Wednesday.
ExxonMobil Australia chairman John Dashwood said the gas conditioning plant would help provide cleaner energy to power economic growth as Australia's energy consumption grew over the next 20 years.
BHP's petroleum chief Michael Yeager said the plant was a necessary extension of Bass Strait infrastructure to enable valuable hydrocarbon liquids production and domestic gas supply for years to come.
BHP, the world's largest diversified resources company and ExxonMobil, the world's largest company by revenue, each have a 50 per cent interest in the Gippsland Basin Joint Venture.
Victoria's Energy Minister Michael O'Brien said the new plant meant the state would get better value out of the gas extracted from Bass Strait.
"We need to have this energy security there because we will diversify from coal, but we can't immediately shift to technology like renewables because renewables aren't as reliable as coal and gas at the moment," he told reporters in Melbourne on Thursday.
Longford was the scene of a catastrophic gas explosion in 1998 that killed two workers, injured eight and disrupted Victorian gas supplies for two weeks.
BHP shares closed 24 cents higher at $36.
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