Australia’s Woodside shelves $45 bln Browse LNG project, the strongest sign yet that the country’s energy construction boom may be peaking

Updated April 12, 2013, 2:57 a.m. ET

Woodside Shelves Browse LNG Project

By ROSS KELLY

SYDNEY—Woodside Petroleum Ltd. WPL.AU +3.17% said Friday it has shelved an onshore gas-export project in Australia estimated to cost over US$40 billion to build, the strongest sign yet that the country’s energy construction boom may be peaking.

Natural gas from the Browse development, which also counts Royal Dutch ShellRDSB.LN -0.21% PLC, BP BP.LN -0.82% PLC and Asian companies as shareholders, will no longer be piped to a processing facility at James Price Point on the Western Australia state coast, Woodside said in a statement Friday.

The decision means a development of one of Australia’s biggest natural gas resources will be pushed back by at least two years, increasing the risk it will have to compete for customers with anticipated gas export projects in North America and East Africa. Woodside and its partners can submit new development plans to regulators, but securing approvals is often slow and time-consuming.Woodside, Australia’s second-biggest oil company by output behind BHP BillitonLtd., BLT.LN -2.10% and its partners have spent almost A$2 billion (US$2 billion) investigating an onshore plant at James Price Point. But Woodside said Friday it “doesn’t meet the company’s commercial requirements for a positive final investment decision.”

The facility would have chilled the resource into liquefied natural gas, or LNG, for export to Asian utilities by tanker.

International energy companies have committed billions of dollars to build seven LNG projects in Australia, positioning the country to overtake Qatar as the world’s biggest exporter of the fuel by 2017. Companies like Shell, Chevron Corp. CVX -0.62% andExxonMobil Corp. XOM -0.33% are drawn by Australia’s vast gas reserves, stable political environment and proximity to fuel-strapped Asian economies.

Construction, however, has been marred by a series of cost blowouts triggered by labor shortages, technical challenges and a strong Australian dollar.

Browse also has its own challenges: the resource is located in deep, remote waters, has a high carbon dioxide content and would be technically difficult to extract. Due to be built in a place marked with one of the world’s longest chains of dinosaur footprints, the development has faced staunch opposition from environmental groups and has angered some traditional land owners.

“Considering a cheaper capital option is prudent under current circumstances, partly given the uncertain outlook for LNG demand over the next four or five years,” said Tim Shroeders, a portfolio manager at Pengana Capital in Melbourne. Pengana doesn’t hold Woodside shares.

Alternative options for Browse’s estimated 15.5 trillion cubic feet resource cited by Woodside Friday include using a floating LNG vessel, which would process the gas out at sea where it lies. Another would be to pipe the gas to an existing LNG facility on the coast, such as the Woodside-operated North West Shelf plant at a later date.

Shell, which owns 27% of Browse, discovered in 1971, wants to take the floating LNG route.

“We believe Shell’s floating LNG technology is the fastest, most economic and the best technical solution available for Browse,” Ann Pickard, the head of Shell’s Australian operations, said in an e-mailed statement Thursday.

Shell will use floating LNG to develop its Prelude natural gas resource near Browse, while Exxon and BHP Billiton earlier this month laid out plans to use the technology at their Scarborough joint venture, also off the coast of Western Australia.

Floating LNG is being pioneered by energy companies seeking to access gas fields too small or remote to develop using pipelines and onshore facilities. However, the technology remains untried and projects face technical risks including withstanding stormy seas and preventing LNG from sloshing around in storage tanks.

Woodside needed to make a final investment decision on James Price Point by June to fulfil a requirement laid down by the government of Western Australia. State Premier Colin Barnett had been a vocal advocate of building a gas processing hub at James Price Point, partly to create thousands of construction jobs.

At a press conference Friday, he said it would be a “tragedy and a missed opportunity” if the gas wasn’t processed onshore, while warning that floating LNG was untried and cyclones are common around the Browse area.

“Ultimately the decision on the development concept is a commercial one for the joint venture, provided it can meet the requisite regulatory requirements,” said Gary Gray, Australia’s resources minister.

Browse isn’t the only Australian LNG project under a cloud. Shell has also raised doubts about the viability of its Arrow LNG joint venture with PetroChina Co.601857.SH 0.00% in Queensland state, citing cost pressures.

Woodside shares added 3.2% Friday as investors bet the company may return cash through buying back its stock. In contrast, the broader S&P/ASX 200 index was flat.

Citigroup C -0.84% said last month that if Woodside didn’t progress with James Price Point it could afford to launch a US$1 billion buyback—even if it spends another US$1 billion on acquisitions.

Australia’s Woodside shelves $45 bln Browse LNG project

4:35am EDT

* Woodside says to consider other floating LNG, other options

* Western Australian govt wanted onshore plant for jobs boost

* Floating LNG option could cut Browse capex by 20 pct-analyst

* Woodside shares rise 3 percent

By Rebekah Kebede

PERTH, April 12 (Reuters) – Woodside Petroleum has shelved plans for its $45 billion Browse liquefied natural gas project in Western Australia, saying it will consider a floating LNG plant after deciding the onshore development did not make economic sense.

Global energy firms have invested $140 billion into six LNG plants in just two and half years as Australia ramps up production on its way to becoming the world’s largest exporter of the clean burning energy source.

But Australia’s LNG sector has seen investor interest cool due to huge costs overruns and with competition from North America where new supplies of gas have been exploited from shale.

The Browse decision could spell an end to new onshore gas projects in Australia in favour of offshore plants that can be built more cheaply and face fewer environmental and landowner hurdles.

“This decision will surprise few as the proposed onshore development always looked too economically, technically, environmentally and socially risky for too little reward,” analysts at Macquarie said in a note.

Woodside also appears to be pivoting its focus towards North America, confirming on Friday that it had lodged an expression of interest to develop a Canadian LNG project.

Browse LNG was to be Woodside’s biggest LNG development yet, but has been plagued by controversy over its proposed location at James Price Point on the northwest coast, coming under fire from environmentalists and some indigenous landowners.

The site is also home to the world’s largest dinosaur footprints and sacred Aboriginal sites known as “songlines”.

Woodside CEO Peter Coleman said any new development would have to provide significant costs savings, adding: “our customers are saying to us very clearly,’No longer can we pay for your expensive projects’.”

A floating LNG plant is considered to be the most likely alternative for Browse by many in the industry.

JP Morgan has estimated that a floating project would mean a 20 percent cost saving with capital expenditure of $35.5 billion versus $44.6 billion for the onshore development option.

Estimates of the cost of the onshore plant vary, but some analysts had said it could be as high as $48 billion.

Of seven LNG plants under construction in Australia, all of which are due to come online in 2014 or later, four have already announced cost blowouts ranging from 15 to 40 percent.

Woodside owns a 31 percent stake in Browse, which it is developing with partners Royal Dutch Shell, BP Plc , PetroChina, Mitsui & Co and Mitsubishi Corp.

CHEAPER FLOATING

Shares in Woodside, which is worth around $30 billion, rose 3 percent on expectations it will develop a cheaper option, but Japan’s Chiyoda Corp, which has a contract for the project, tumbled 11 percent.

Building a floating plant in Asia and towing it into place off the Western Australia coast is likely to save billions of dollars in construction costs.

Shell, which owns 24 percent of Woodside and is the second-largest shareholder in Browse, is considered to be the global frontrunner in developing floating LNG technology.

“We believe Shell’s floating LNG technology is the fastest, most economic and the best technical solution available for Browse,” Shell Australia country chair Ann Pickard said in an emailed statement.

Another joint venture partner, PetroChina, said on Friday it is still deciding whether it will invest in Browse and is studying the project’s feasibility.

Earlier this month, Exxon Mobil and BHP Billiton revealed plans to build the world’s largest floating LNG vessel offshore northwestern Australia, producing 6-7 million tonnes per annum (mtpa) of LNG from 2020-2021.

Woodside’s Browse had been targeting 12 mtpa.

POLITICAL BLOW

The decision to shelve Browse is a blow to West Australia’s premier, Colin Barnett, who won reelection last month and has been a vocal proponent of establishing a gas export hub at James Price Point, with Browse LNG as the cornerstone project.

Another option for the plant would be for it to be delayed until construction costs ease, something some analysts expect to occur once the existing plants under construction in Australia come online.

“If Shell were to persuade Woodside that they need to take more time on this, I don’t think Shell would be criticized. I think that would be seen as a sensible decision at this point,” Tony Regan, an analyst with Tri-Zen International in Singapore said.

Shell has delayed its Arrow LNG development in eastern Australia and has said it is in no hurry to proceed with an expansion of Gorgon LNG, in which it is a stakeholder, leading some to believe that the company would prefer to wait for costs to decrease before making more large investments in Australia.

Prime Minister Julia Gillard said the decision was a commercial one and did not mark the end of the country’s near decade-long boom in resources.

“We haven’t seen the peak of the investment phase into resources yet. And we are yet to see the peak of the production phase,” Gillard told reporters in Sydney.

“So we will be seeing the resources boom at work in our economy for a long time to come.”