Origin Needs at Least One More Customer to Expand Conoco LNG Venture

Origin Energy Ltd. (ORG), ConocoPhillips (COP)’s partner in a $20 billion Australian liquefied natural gas venture, said it aims to sell more than half the fuel from the project’s second phase before committing to an expansion.

The project in Queensland state will likely need to sell 50 percent to 75 percent of the LNG from the second stage before the partners make an investment decision, Karen Moses, executive director of finance and strategy at Sydney-based Origin, said today in a telephone interview, adding that no final decision had been made.

Origin and Conoco, the third-largest U.S. oil company, are among energy companies in Australia planning more than A$200 billion ($200 billion) of LNG projects to tap rising Asian demand for the cleaner-burning alternative to coal. The venture yesterday agreed to supply Japan’s Kansai Electric Power Co. with 1 million metric tons of LNG a year, or almost 25 percent of the capacity from the second unit, or train.

Origin and Conoco are pursuing “at least one more” buyer for the coal seam gas-to-LNG venture, with customer interest increasing since the nuclear crisis in Japan caused by the March 11 earthquake and tsunami, she said.

The partners approved the first stage of their Australia Pacific LNG development in July, targeting first exports in mid-2015.

“We’ve seen stronger engagement in the last three to six months than we had before,” Moses said. “Japan does have a considerable task to work through what their future fuel mix is going to look like. They need gas for 2016 and to be part of a project that’s going to deliver that gas in 2016.”

Customers ‘Well-Informed’

Asian customers are aware of the opposition among some farmers, environmentalists and politicians on the east coast of Australia to expanding coal-seam gas exploration, she said. The concerns haven’t discouraged buyers, she said.

“The conversation might be different if we weren’t a permitted project,” Moses said. “But we are a permitted project, and the customers we are having conservations with are getting themselves deeply informed about the project. They know the quality of the resource, the acreage, the regulatory environment and the fiscal environment.”

Origin, whose shares fell 1.2 percent in Sydney today to A$14.35, plans to raise A$500 million selling hybrid notes to help fund its share of the project, the company said Nov. 15. Hybrid notes blend debt and equity characteristics.

Supply Deal

Conoco and Origin in April agreed to supply 4.3 million tons of LNG a year to China Petrochemical Corp. They also agreed to sell Sinopec Group, as the Chinese company is known, a 15 percent stake in the venture. Annual capacity from stages one and two of the project will be 9 million tons.

Selling a further “1 million tons is not enough” to approve an expansion, Moses said. “But the economics don’t need the full second train, or 100 percent, to be contracted. If we’re making sufficient progress with customers, there’s no reason why we wouldn’t expect it to be 100 percent either.”

The agreement with Kansai depends on Origin and Conoco committing to build the second stage, a decision that is expected early next year, Origin said yesterday.

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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