Papua New Guinea Prime Minister Peter O'Neill has formally tendered his resignation to the Pacific country's Governor-General rather than face a parliamentary no-confidence motion.

"At 9.35am this morning I delivered to his excellency ... the Governor-General, my letter of resignation," he said in parliament at Port Moresby on Wednesday.

O'Neill had promised to resign on Sunday after a string of defections from his government plunged his leadership into question and cost him his majority.

On Tuesday, an opposition bloc working to unseat O'Neill's government elected National Alliance Party leader Patrick Pruaitch as "alternate prime minister".

But O'Neill, who has been in power since 2011, has nominated former prime minister Julius Chan, 79, to replace him and said he was confident the government would have the numbers to stay in power.

Chan, for his part, emphasised to PNG media he had not been designated an official role and O'Neill had no power to nominate the new prime minister.

He also said he did not wish to claim the prime ministership.

O'Neill was forced to announce his resignation after the MP defections left him open to lose a vote of no confidence. He believed defectors would return to government ranks after the leadership change.

The defectors from the government alleged O'Neill was a dictatorial leader and raised concerns about PNG's oil and gas resources projects.

Under scrutiny is O'Neill's involvement in a $A1.2 billion loan through finance group UBS for the government to buy a 10 per cent stake in Australian Stock Exchange-listed firm Oil Search, which used the money to buy into the Elk Antelope gas field being developed by France's Total.

A report by the Ombudsman Commission of PNG criticising the 2014 deal and its lack of returns for locals is scheduled to be tabled next week.

Australian Foreign Minister Marise Payne on Monday said she was confident Canberra would maintain a good relationship with PNG, no matter the leader.