PNG raised the funds from International Petroleum Investment Co, an Abu Dhabi-owned investment fund, through the sale of bonds that could be exchanged for its 14.7% stake in Oil Search.
But with the March conversion date looming, the government has reportedly decided to raise the cash instead of giving up the stake in the oil and gas producer.
A source familiar with the deciion told Reuters that the PNG government had appointed UBS to help it raise $1.68 billion to refinance the IPIC bond.
With analysts forecasting Oil Search's annual profit would more than quadruple, there was heavy competition for the mandate to work with the PNG government, the source said.
The convertible debt deal, which was struck in 2008 during the financial crisis, is expected to trigger a contest for a slice in the $19 billion PNG LNG project.
ExxonMobil subsidiary Esso Highlands is constructing and will operate the project on behalf of Oil Search, NPCP, Santos, JX Nippon Oil & Gas Exploration, Mineral Resources Development Company and Petromin PNG Holdings.
The project is more than 90% complete and on schedule for the first delivery of LNG during the second half of 2014.
Oil Search owns 29% in the project and shares in the company were last trading at $8.24 on the Australian Securities Exchange.
Meanwhile, encouraging economic data in the US underpinned overseas gains and set up the local market for improvements going into the weekend.
The Dow Jones Industrial Average was up 1.2% to 15,628 points, while the S&P 500 gained 1.2% to 1773 and the NASDAQ closed 1.1% higher at 4057.
The US Department of Labor recorded a 3.2% increase in productivity over the fourth quarter of 2013, reflecting a 4.9% rise in output and a 1.7% increase in hours worked.
European markets also posted widespread gains, with the Euro Stoxx up 1.6% to 3010 points, the FTSE 100 up 1.5% to 6558 and Germany's DAX index 1.5% higher at 9256.
The SPI 200 Futures index had risen 37 points this morning at 5119.
Singapore Tapis crude closed at $US112.16 a barrel overnight.
London Metal Exchange cash copper closed at $7178 a tonne overnight, compared to the price of $7096 at the end of last week.
By the same comparison, LME spot nickel's overnight price was $13,939/t, compared to last week's price of $13,928.
Spot gold was trading at about $1260 an ounce, from the price of $1244 last Friday.