* Underlying profit down 39 pct, but beats forecasts
* Post-quake community recovery to take years - CEO
* PNG aims to agree LNG expansion fiscal terms by Nov
* (Recasts, adds managing director comments)
By Sonali Paul
MELBOURNE, Aug 21 (Reuters) - Australia's Oil Search Ltd reported a near 40 percent fall in half-year profit on Tuesday, but the drop was not as bad as feared after an earthquake in Papua New Guinea forced it to shut oil and gas production.
Oil Search's operations supply gas to the PNG LNG liquefied natural gas project, run by ExxonMobil Corp, which was shut for six weeks after a 7.5 magnitude earthquake hit the country's rugged highlands in February, triggering widespread damage. More than 145 people died.
"It has been a very, very challenging time," Oil Search Managing Director Peter Botten told reporters.
"We anticipate it will actually be a number of years before our key communities in the Highlands area get back to some form of normality as roads and schools start to open and they get their gardens back on their feet," he said.
Oil Search's oil facilities are all back on line, but will take around six months to return to normal operating rates, Botten said.
But he said PNG LNG had recovered well, achieving record rates above 9 million tonnes a year, or 30 percent above its design capacity, since restarting production in mid-April.
As a result, Oil Search raised its production guidance for 2018 to between 24 million and 26 million barrels of oil equivalent (boe) from 23 million to 26 million boe flagged in July.
Net profit fell to $79.2 million for the six months to June from $129.1 million in the same half last year, but beat an average of five broker forecasts of $69 million.
Production costs for the half year rose to $14.04 per boe, from $8.52 a year earlier, due to the drop in output. For the full year it sees production costs at between $11 and $13 per boe.
Oil Search's shares fell 2.4 percent on Tuesday, underperforming a 1.8 percent fall in the ASX energy index .
The focus for Oil Search in the second half will be on talks with its partners in PNG LNG and Papua LNG, led by France's Total SA, and the Papua New Guinean government about a $12 billion expansion of the PNG LNG plant.
They plan to add 8 million tonnes a year of capacity, with two new production units, or trains, to be underpinned by Papua LNG's Elk and Antelope fields, and one train to be underpinned by PNG LNG's P'nyang field.
PNG Prime Minister Peter O'Neill has said he wants to finalise an agreement on the LNG expansion before the Asia Pacific Economic Co-Operation (APEC) summit in PNG in November, Botten said.
"There still is a lot to do, but real progress is being made," Botten said.
The earthquake aftermath made negotiations tougher, with a backlash against the project from locals who considered the quake a natural reaction to gas drilling.
The government is pressing Oil Search, Exxon and Total for better fiscal terms for the expansion than the original PNG LNG project after its revenue from the country's biggest natural resource venture was less than expected. The plant started exports in 2014 just before oil prices collapsed.
"We all understand there has to be a balance of rewards for all parties to make this work," Botten said.
Reporting by Devika Syamnath in Bengaluru; editing by Richard Pullin and Christian Schmollinger