Woodside Scraps $46 Billion LNG Plan After Build Costs Rise

Woodside Petroleum Ltd. (WPL), Australia’s second-largest oil producer, scrapped a plan to build a $46 billion onshore liquefied natural gas project on the nation’s northern coastline because of surging costs.

The Browse project partners, including Royal Dutch Shell Plc (RDSA) and BP Plc (BP/), will study alternatives including a floating LNG plant or a pipeline to existing facilities in Western Australia, the Perth-based company said today in a statement. A smaller onshore plant is also an option, it said.

“It’s the right decision to shelve it,” Andrew Williams, a Melbourne-based analyst at RBC Capital Markets, said today by phone. “I don’t think anyone in the investing community thinks the Browse plant was anything but a marginal project.”

Australia’s LNG industry, with almost $200 billion of projects under development to tap rising Asian demand, is facing increasing construction costs with energy producers from Chevron Corp. (CVX) to BG Group Plc (BG/) announcing budget overruns. The onshore plant would have cost A$44 billion ($46 billion), according to estimates by Deutsche Bank AG.

Woodside shares rose 3 percent to A$36.34 as of 10:10 a.m. Sydney time, while the benchmark index climbed 0.2 percent.

“Unfortunately the cost escalation has been such that the total costs for Browse have resulted in the current development concept not being commercial,” Woodside Chief Executive Officer Peter Coleman said today in a separate statement.

8,000 Jobs

Woodside reached a deal last year to sell a 14.7 percent stake in Browse to Mitsubishi Corp. (8058) and Mitsui & Co. for $2 billion. BHP Billiton Ltd. (BHP), Australia’s largest oil and gas producer, agreed in December to sell its stake in Browse to PetroChina Co, the nation’s biggest oil and gas producer, for $1.63 billion.

The Browse partners probably will opt to process the gas on a floating LNG vessel offshore after determining that the proposal for a new processing hub on the coast wasn’t viable, Goldman Sachs Australia Pty said in a Feb. 4 report. That change in plans may lead to delays, Goldman Sydney-based analysts Mark Wiseman and Anthony Ta wrote.

Woodside estimated the project at James Price Point in the Kimberley region would have created as many as 8,000 jobs during construction and generated as much as A$50 billion in gross domestic product for the Australian economy, according to its website.

Australia’s unemployment rate climbed in March to the highest level in more than three years, the statistics bureau said yesterday in Sydney. General Motors Co.’s Holden division this week announced further job-cut plans, saying it will trim about 500 jobs while citing the local dollar’s strength, and currency devaluations in competing markets.

Chevron Costs

Chevron said in December that the cost of its Gorgon LNG venture jumped 21 percent to A$52 billion ($55 billion) on local currency gains and higher labor expenses. BG, operator of one of three LNG projects under construction in Queensland state, said last year that the cost of its development increased 36 percent to $20.4 billion because of increases in the local currency, rising labor and material costs and higher regulatory expenses.

The venture’s lease for Browse runs out at the end of 2014, Woodside said today.

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To contact the reporters on this story: James Paton in Sydney at jpaton4@bloomberg.net; Soraya Permatasari in Melbourne at soraya@bloomberg.net

To contact the editor responsible for this story: Jason Rogers at jrogers73@bloomberg.net

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