Woodside Says Pluto LNG Costs May Rise by $1 Billion

Woodside Petroleum Ltd. (WPL), Australia’s second-biggest oil and gas producer, said the cost of its Pluto project is set to jump by as much as A$1.1 billion ($1 billion) partly because of higher-than-expected labor expenses.

The total bill for the liquefied natural gas venture in Western Australia may be 6 percent to 10 percent more than the A$11.2 billion approved in 2007, Perth-based Woodside said today. Pluto’s first phase is 82 percent completed and it remains on schedule to start shipping gas in 2011.

Pluto is one of at least a dozen LNG projects proposed in Australia seeking to tap Asian demand for cleaner-burning fuels. The developers face a contest for welders, pipe fitters, technicians and boilermakers, potentially driving up the price of labor. Estimated first-phase costs for Exxon Mobil Corp. (XOM)’s Papua New Guinea LNG venture have risen to $15 billion from $12.5 billion, partner Oil Search Ltd. said Oct. 19.

“It’s never a good thing when costs move up,” Andrew Williams, a Melbourne-based analyst at Credit Suisse, said by phone today. “The impact is a minor negative.”

Woodside fell 2.8 percent to A$48.69 in Sydney, the most in three weeks, compared with the 1.3 percent drop in the benchmark S&P/ASX 200 Index. (AS51)

Pluto and Chevron Corp.’s Gorgon LNG project, also in Western Australia, are among ventures underscoring the nation’s status as an “energy superpower,” Energy Minister Martin Ferguson said in September.

‘Two-Speed’ Economy

Australia’s resources hiring boom has made central bank Governor Glenn Stevens concerned that a “two-speed” economy is emerging, with unemployment falling in the mining and energy rich states of Western Australia and Queensland, while increasing in New South Wales, the most populous state.

Western Australia’s jobless rate fell last month to 5 percent from 5.7 percent, a Nov. 12 report showed, while rising to 6.1 percent in New South Wales from 5.5 percent. The national rate rose to 5.8 percent from 5.7 percent. Unemployment in the U.S. is at a 26-year-high of 10.2 percent.

Standard & Poor’s Ratings Services today placed Woodside’s A- long-term corporate credit and associated debt ratings on CreditWatch with negative implications.

“The additional capital costs to complete the project could put further pressure on Woodside’s credit metrics,” Melbourne-based Standard & Poor’s credit analyst May Zhong said in a statement. Any prospective downgrade would most likely be one notch, Zhong said. A weaker credit rating may increase Woodside’s borrowing costs.

‘Modest’ Funding

The higher outlay at Pluto may prompt the oil and gas explorer to seek a “modest” amount of additional funding for the project that it could raise through asset sales or debt, Adrian Wood, a Melbourne-based analyst at Macquarie Group Ltd., said by phone, declining to provide an estimate.

Woodside said earlier this month it sold $700 million in bonds. The company also agreed to sell its stake in the Otway gas project off the southeastern coast to Origin Energy Ltd. (ORG), Australia’s second-largest electricity and gas retailer, for A$713 million.

Woodside may need A$3.5 billion of equity funding to maintain its credit rating and approve an expansion of Pluto, Sydney-based analysts at JPMorgan Chase & Co. wrote in a Nov. 17 report. The company could also potentially raise “hundreds of millions of dollars” selling assets, including offshore exploration acreage in Sierra Leone, Brazil and Libya, Mark Greenwood and his colleagues wrote.

Peak Construction

Woodside in its statement cited “lower than budgeted productivity in both onshore and offshore construction.”

In August, “we warned that we were heading into a period of peak construction on the Pluto site and that that was a critical time for the project,” Roger Martin, a spokesman for Woodside, said by phone from Perth. One of a range of factors is an anticipated “shortage of some trades, and that can increase costs,” Martin said.

Macquarie’s Wood said further cost adjustments for Pluto aren’t likely. “We are now close enough to completion that I would be surprised to see further cost overruns.”

A program to drill more than 20 wells starting this quarter will support an enlargement of the venture while the company continues talks with possible suppliers of gas for additional production units, or trains, Woodside said Oct. 23.

LNG is gas chilled to liquid form for shipment to destinations not connected by pipeline. On arrival, it is converted back to gas and piped to customers.

To contact the reporter on this story: James Paton in Sydney at jpaton4@bloomberg.net

To contact the editor responsible for this story: Amit Prakash at aprakash1@bloomberg.net

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