Australia's Woodside Shelves $40 Billion Browse LNG Project

Liquifaction Plant
Source: The Center for Liquefied Natural Gas
Liquifaction Plant

Woodside Petroleum has shelved plans for its $40 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.

Australian LNG projects have seen a series of huge cost overruns as the country ramps up production on its way to becoming the world's largest exporter of the clean burning energy source.

Some analysts believe the decision on Browse spells an end to new onshore gas projects in Australia in favor of offshore plants that can be built more cheaply and face fewer environmental and landowner hurdles.

(Read More: Australia's Dollar Quietly Over the Moon About LNG)

"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.

"While the JV appears to have finally seen sense, this decision probably also calls an end to green field onshore projects in Australia."

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 Aboriginal landowners.

Woodside said it would immediately begin evaluation of other options including a floating LNG plant, pipelines to existing facilities elsewhere in the region or a smaller onshore plant.

(Read More: Chinese Firm Looks to Tap US Natural Gas Market)

"Woodside firmly believes that the Browse resource is world class," Woodside CEO Peter Coleman said on Friday. "We are working to underpin this value by bringing forward the earliest possible development of Browse."

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.

Estimates of the cost of the onshore plant option vary, but some analysts estimate that if it is on par with other LNG plants underway, such as Chevron Corp's Gorgon plant, 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.

Cheaper Floating

Shares in Woodside, which is worth around $30 billion, rose 3 percent on expectations the company will develop a cheaper option or free up more cash for shareholders.

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.

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 tons per annum (mtpa) of LNG from 2020-2021.

(Read More: Arkansas Launches Probe Into Exxon Pipeline Spill)

Woodside's Browse project had been targeting 12 mtpa.

A person with knowledge of the joint venture partner discussions said Shell had been pushing the partnership to go with a floating LNG option given the high costs of an onshore plant.

Shell, which owns 24 percent of Woodside, has not publicly supported a floating LNG plant for Browse, but Ann Pickard, Shell Australia's chairman has, pointed to floating LNG as a good solution for Australia's problems with high costs.

Pickard has also championed floating LNG as a way for Australia to make revenues faster.

Political Blow

However, the decision to shelve the project 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.

(Read More: Sundance Scraps Deal With Hanlong, Shares Plunge)

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.

(Read More: Former Woodside Adviser Joins Australia's Cabinet)

"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."