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Bloomberg: Woodside Needs to Expand Pluto LNG to Raise Returns (Update1)

By Angela Macdonald-Smith

July 30 (Bloomberg) — Woodside Petroleum Ltd., Australia’s second-biggest oil and gas producer, will need to expand its proposed A$12 billion ($10.2 billion) Pluto liquefied natural gas project to improve returns on the investment, analysts said.

The Perth-based company needs to add a second and third LNG production unit to the project in Western Australia “to turn an OK project from an economic point of view into a good one,” said Frank Harris, global head of LNG at Wood Mackenzie Consultants Ltd. in Edinburgh.

Woodside on July 27 approved the investment in Pluto, which is costing more than a November estimate of A$6 billion to A$10 billion due to a “highly escalating cost world,” said Chief Executive Officer Don Voelte. Work will immediately start on planning for a second and third units at the site on Western Australia’s Burrup Peninsula, to be called the Burrup LNG Park.

“Woodside indicated the internal rate of return on Pluto would be 10-15 percent, which we would describe as good, not great,” Wall Street Access said in a July 27 report. Subsequent expansions would probably be more profitable, it said.

The first LNG production unit will have an average output of about 4.3 million metric tons a year, most of which will be shipped to two Japanese utilities, Tokyo Gas Co. and Kansai Electric Power Co. Woodside, which is seeking environmental approval for 12 million tons a year of production, doesn’t have enough gas in the region of Pluto, about 190 kilometers (118 miles) northwest of Karratha, to supply an expansion.

Gas may be sourced either from discoveries Woodside makes off the northwest coast, from existing undeveloped fields in the Browse Basin to the northeast, or from rivals with undeveloped fields in the area, Voelte told reporters July 27 in Perth.

Higher Prices

Woodside needs to expand the project within one or two years after initial deliveries start, due late 2010, to get higher prices for the LNG, given a forecast worldwide increase in supply of the fuel toward the middle of next decade, Harris said.

“They could get much better prices for a second train if they can pull it together quickly,” Wood Mackenzie’s Harris said. That timing may be a “challenge” if Woodside has to start negotiating with rival companies for gas supplies, he said.

The A$12 billion cost includes some spending in the expectation of expansion, Voelte said on July 27.

“We clearly do not see Pluto to be a one-train development,” he said. “There’s a lot of gas out there that could potentially come through Pluto.”

Shares in Woodside, 34 percent owned by Royal Dutch Shell Plc, fell 26 cents, or 0.6 percent, to A$42.75 on the Australian Stock Exchange, beating a 0.9 percent drop in the exchange’s benchmark energy index.

Chevron, Apache

Chevron Corp.’s Wheatstone gas field and Apache Corp.’s Julimar discovery are candidates to supply the Burrup LNG Park, Macquarie Equities Ltd. said today in a report. The Io/Jantz field is another possibility should Chevron’s delayed Gorgon LNG project not proceed, it said.

“The concept of a Burrup LNG Park with up to three trains at Pluto suggests there is more upside to come in this part of Woodside’s plan with significant economy of scale opportunities for later brown-field expansions,” Macquarie analysts Andrew Blakely and Brendan Warn said.

Woodside appears to have negotiated “significantly higher” LNG prices with its customers than those in the original sales accords, which helps offset the cost which is more than 30 percent higher than expected, JPMorgan Chase & Co. said in a July 27 report. The initial project may have a return of 12.4 percent, based on $50 a barrel oil, it said.

UBS AG in a separate July 27 report estimated the rate of return from the initial Pluto project of 13.2 percent. It had earlier estimated the cost as A$9 billion.

Cost Risks

Woodside faces the risk of further cost escalation, Deutsche Bank AG said.

“The Burrup LNG project, starting with Pluto, is bold and compelling but requires successful execution of Pluto in an unpredictable cost environment,” Deutsche said July 27.

Cost overruns or delays in to either Pluto or the expansion of the Woodside-operated North West Shelf LNG venture could cut the company’s “strong” returns and weaken the “currently modest financial risk profile,” Standard & Poor’s Ratings Services said today in a statement. Woodside is rated A- by S&P.

LNG is gas chilled to liquid form, reducing it to one-six- hundredth of its original volume, for transportation by tanker to destinations not connected by pipeline. On arrival it is turned back into gaseous form for delivery to users such as factories, power plants and households.

To contact the reporter on this story: Angela Macdonald-Smith in Sydney at [email protected] .

Last Updated: July 30, 2007 03:09 EDT

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