Prime Minister Scott Morrison and PNG counterpart Peter O'Neill have agreed to jointly redevelop the Lombrum naval base on Manus Island.
Australian troops will soon have access to a strategically vital naval base on Manus Island, with the federal government agreeing to help Papua New Guinea redevelop the site.
Scott Morrison and Peter O'Neill struck a deal on the joint redevelopment in Sydney on Thursday afternoon.
The prime ministers also inked an agreement on a long-term police partnership and committed to annual leader-to-leader talks.
It is expected PNG will retain ownership of the Lombrum naval base but Australian personnel will live and work on site.
From Australia's perspective, the benefits are two-fold.
It will allow Australian ships to use the port and expand the navy's footprint in the Pacific.
But it also shuts the door on Chinese ambitions to redevelop the Manus port - a prospect which had alarmed Australian defence officials.
Australia is already spending $5 million to upgrade a wharf at the facility as it prepares to "gift" PNG four patrol boats.
Chief of Navy Michael Noonan described the deal as "hugely important".
He expects Australian warships will make use of the port.
"I think ultimately what that might look like in terms of the nature of the ships, that'll take a little while to get some clarity around that," Vice Admiral Noonan told reporters in Canberra on Thursday.
"It's a pretty small place and the facilities there wouldn't take an LHD (Landing Helicopter Dock), for example, but in time I guess we'll look forward to seeing what the development provides."
US Chief of Naval Operations John Richardson, who is visiting Australia for talks on regional security and the Indo-Pacific, described the joint redevelopment as a "terrific opportunity".
"I think it's a great example of the leadership that Australia and the Royal Australian Navy is exercising in this region," he told reporters.
"From the United States Navy's perspective, we look forward to identifying opportunities where we can support that."
Admiral Richardson said it was too early to tell if US ships would eventually make use of the port.
"You can see nothing but potential going forward and we'll just have to see how the details manifest themselves," he said.
Appearing before a recent Senate estimates hearing, Defence secretary Greg Moriarty said Australia would likely shoulder most of the redevelopment costs.
"My expectation is that should the Australian government agree to something like that, we would take the lion's share of the funding," Mr Moriarty told the committee.
PNG would contribute to the maintenance and sustainment of the base, he said.