Escalating Australian LNG Costs Spur Woodside to Look Abroad

Surging costs in Australia, set to become the world’s largest liquefied natural gas exporter by 2018, are stoking a drive by Woodside Petroleum Ltd., the nation’s second-biggest oil and gas producer, to expand overseas.

The Perth-based company, which last month scrapped an estimated $45 billion onshore LNG project in Australia, is looking to make investments of about $5 billion in projects globally, Chief Executive Officer Peter Coleman said in an interview in Brisbane, where he attended a conference.

“Moving overseas is a recognition that Australia is very, very competitive at the moment,” Coleman said yesterday, adding that the company isn’t negotiating any acquisitions. “For Woodside to be able to grow at the pace we need to we’ve got to find other opportunities. They exist elsewhere.”

Australia may lose A$100 billion ($97 billion) of potential liquefied natural gas projects to East Africa and North America unless costs in the nation are reduced, the Australian Petroleum Production & Exploration Association said this week. Woodside is expanding overseas, including in Israel, and lodged its interest in April in developing a liquefied natural gas project on the coast of British Columbia.

“What does this say about the Aussie market when the national champion in oil and gas is going overseas?” Geoffrey Cann, Brisbane-based national director of oil and gas consulting at Deloitte LLP, said yesterday in an interview. “Australia has a very significant challenge in front of it, and it’s clearly starting to drive the oil and gas industry to hedge its bets and exploit opportunities globally.”

Woodside fell 0.5 percent to A$36.50 in Sydney.

Leviathan Gas

The company, which has studied expansion options in the Eastern Mediterranean region, Southeast Asia and the Americas, agreed in December to pay as much as $2.3 billion for a stake in Israel’s largest natural gas field, Leviathan. The company also reached two exploration agreements last year off Myanmar.

“I’d like more $5 billion projects for Woodside,” Coleman said. “When you look at the size of the company and our ability to execute, a $5 billion equity share is a sustainable and comfortable number for us and it also builds wealth at a good pace.”

Woodside ditched the proposed Browse LNG project at a site on the Western Australia coast because it was too expensive. A new onshore Browse development would have cost about $45 billion, JPMorgan Chase & Co. said in an April 12 report.

Near-Term Growth

“Coleman recognizes that he’s there to grow the company, it’s just a question of time,” John Hirjee, a Melbourne-based energy analyst at Deutsche Bank AG, said yesterday by phone. With Woodside now considering floating LNG technology for Browse, “what’s lacking is near-term production growth,” he said.

Woodside is waiting for Israel’s government to outline its gas-export policy, expected “in weeks, not months,” before it can complete the Leviathan transaction, Coleman said. Investment opportunities are few and far between in Australia and highly priced, he said.

The Australian oil producer agreed to buy a 30 percent share in the Leviathan field for an initial $696 million from companies including Noble Energy Inc. and Delek Drilling LP.

Woodside, operator of the Pluto and North West Shelf projects in Australia, is studying bids on fields off Myanmar and was unsuccessful in bidding on blocks in Brazil, Coleman said. Opportunities to invest in oil and gas prospects in Australia are limited, with acreage “tightly held,” he said.

“A company like Woodside has expertise developing large, complex LNG projects, so taking that expertise and leveraging that into other opportunities makes sense,” Andrew McManus, vice president of energy consulting for Australasia at Wood Mackenzie Ltd., said yesterday in an interview in Brisbane. “For them expanding beyond Australia to grow their business is a natural move.”

Surpassing Qatar

While Australia is forecast to surpass Qatar as the world’s largest exporter of LNG by the end of the decade with almost A$200 billion ($193 billion) of projects going ahead, it’s facing increasing competition from North America and East Africa.

Delays and spending over-runs are endemic to Australia, according to an April report from Sanford C. Bernstein & Co., which estimates that projects in Australia run from 15 percent to 50 percent over their original cost estimates.

“One thing we’re looking at is diversifying our portfolio, looking at that from the point of view of our cost base, and also chasing opportunities that fit into the scale of assets that we look for,” Coleman said. “The larger types of fields, they simply don’t exist in Australia, it says we have to diversify.”

Chevron, BG

BHP Billiton Ltd., the world’s biggest mining company, and rivals are also being dogged by surging costs. Producers of everything from gold to coal are firing workers and putting assets up for sale, as they are squeezed by unfavorable foreign exchange rates, lower prices and higher labor costs.

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

“You don’t want to get locked into one place,” Coleman said. “While Australia is advantageous for us in many aspects, we need to be able to continue to invest through the entire investment cycle. We need to have other options, so moving out of Australia we’re chasing the rocks, and it diversifies our cost base and cost structure as well.”

Before it's here, it's on the Bloomberg Terminal.