The decision was made by a national executive council of the fledging coalition government formed under controversial circumstances in early August.
Petroleum and Energy Minister William Duma, who long served in this role under the previous government led by Sir Michael Somare, said the NEC believed that the Gulf project was far from being a world-class project of international scale and quality.
It was deemed a small scale, fragmented LNG project combining different production methods.
"These include a land-based LNG plant using multiple mini LNG trains to be developed by Energy World Corporation and a fixed floating LNG plant to be developed by Flex LNG and Samsung," Duma said.
"Clearly, this is not the project contemplated by the project agreement and to which the state has dedicated its gas for commercialisation."
The Gulf LNG project was targeting 5 million tonnes per annum in 2014 - 3MMtpa from an EWC-developed onshore modular LNG plant and the rest from a floating LNG facility.
An expansion was slated to ramp up the total Gulf operations to 8MMtpa through 2015 and 2016.
The plans to commercialise InterOil's Elk-Antelope discoveries in the Gulf province are somewhat different to the project's earlier Liquid Niugini Gas incarnation, which was solely aimed at building an onshore 6-9MMpta LNG plant adjacent to InterOil's oil refinery at Napa Napa.
Duma said that since May 2010, his department's secretary had been conveying the government's requirements to InterOil and its joint venture partner Liquid Niugini Gas Limited to deliver the project contemplated in the agreement struck back in 2009.
The minister said the developers ignored the concerns and proceeded to publicly promote a different project without seeking the government's prior approval.
"I have also reminded LNGL and InterOil to comply with their contractual obligations to deliver a world class project with the support of a world class LNG operator," Duma said.
"While the Gulf project includes a number of high quality companies, none are internationally recognised LNG operators with experience operating the world scale LNG plant that LNGL/InterOil has contracted to deliver.
"Hence they do not fit the description or intent of a world class operator as contained in the project agreement [with the government]."
Duma said the NEC remained supportive of a second LNG project by InterOil and LNGL but the Liquid Niugini Gas onshore plant project agreement must be complied with.
The minister further warned that if the two companies continued to advance the Gulf project as it is, they would "inevitably reach a point of committing a repudiatory breach" of the project agreement with the government.
PNGIndustryNews.net is seeking comment from New York-listed InterOil on Duma's recent statement and the NEC decision.
While InterOil has made substantial progress exploring reef structures in Gulf province over recent years, it is also PNG's sole oil refiner.
EWC owns and operates an 8.7 megawatt gas-fired, baseload power station at Alice Springs and has LNG projects in Indonesia and the Philippines.
A Supreme Court challenge is underway in PNG over whether the appointment of Peter O'Neill as prime minister last month was constitutional.
The controversial parliament vote occurred in early August while Somare was on medical leave following surgery in April.
According to recent media reports, Somare is recovering well from heart, lung and kidney operations in Singapore and returned to PNG earlier this month.
O'Neill has previously rated InterOil's Gulf project as the same importance to PNG as the ExxonMobil-led PNG LNG project.