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Woodside Scraps Planned California LNG Import Project

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Woodside Scraps Planned California LNG Import Project (Update2) 

By Angela Macdonald-Smith

Jan. 16 (Bloomberg) — Woodside Petroleum Ltd., Australia’s second-largest oil and gas producer, scrapped a plan to import liquefied natural gas into California because market conditions no longer support the project.

An application to U.S. regulators for planning approval for the OceanWay venture, which was to be built off Los Angeles, is being withdrawn, Perth-based Woodside said today in a statement to the Australian stock exchange.

Woodside, which supplies LNG to North Asia, had intended to provide 15 percent of California’s annual gas supplies from a vessel and buoy system off the coast. The state’s gas and electricity utilities in December cut their forecast for gas demand growth to 0.1 percent a year through 2030, from 0.5 percent two years earlier, citing no growth from power generators and declining industrial use.

“If the forecast was for flat gas demand through 2030, it was always going to be difficult to import significant tranches of gas into California,” said Andrew Williams, an energy analyst at Credit Suisse Group in Melbourne. “It’s no great loss in terms of I don’t think anyone had it in their numbers for Woodside. But what it does do is limit their long-term gas options.”

Woodside dropped as much as 35 cents, or 1 percent, to A$33.70 in Sydney trading and was at A$33.70 at 10:35 a.m. local time. The decline compared with a gain or as much as 1.2 percent in the exchange’s benchmark energy index.

Lower Prices

Today’s statement follows Woodside’s decision in December to cut the size of the project, citing community and regulatory concerns, and weaker customer demand. Larger rival BHP Billiton Ltd. dropped a similar, $800 million proposal in 2007 amid opposition from local residents and environmental groups.

“We still believe in the long-term value of liquefied natural gas as a new source of clean, reliable and secure energy for Los Angeles,” Steve Larsen, president of Woodside Natural Gas, said in the statement. “But we must acknowledge the impact of the current market.”

Woodside originally announced its plans for OceanWay based on four consecutive years of declining U.S. gas production, said Roger Martin, a spokesman in Perth. Since then, production has increased and output in 2008 is expected to be more than 20 trillion cubic feet for the first time since 1974, he said. The company wouldn’t rule out re-submitting the planning application should market conditions change, he said.

Potential Charge

Woodside, 34 percent owned by Royal Dutch Shell Plc, can’t say yet whether it would include a charge in its accounts for expenditure so far on the project, Martin said, declining to quantify the amount.

Gas prices in California are likely to be lower than global LNG prices in the “near-term,” meaning that “significant” LNG deliveries to the state are unlikely, Richard Myers, program and project supervisor of the California Public Utilities Commission, said in a December presentation.

Natural gas futures in New York have dropped 57 percent in the past six months as the slowing economy cut demand. Crude oil prices have plunged 74 percent in the same period.

Sempra Energy, owner of the largest U.S. natural gas utility, opened North America’s first West Coast terminal last year, on Mexico’s Baja Peninsula. The U.S. has import plants on the western coast, from where supplies would be received from Asian producers.

‘Difficult Environment’

Former Australian Resources Minister Ian Macfarlane said in 2004 the U.S. could become Australia’s largest export market for LNG, buying more than A$50 billion worth over 30 years starting as early as 2010.

“Twelve or 18 months ago we were all starting to contemplate the world as one global gas market, and that required the opening up of the states on the West Coast,” Credit Suisse’s Williams said. “It looks as if that will take a bit longer to happen now. It highlights it’s going to be a pretty difficult operating environment for the next few years.”

LNG is natural gas chilled to liquid form for transportation by tanker to destinations not connected by pipeline. Woodside produces the fuel at the North West Shelf venture in Western Australia, where it is also building the Pluto LNG plant.

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

Last Updated: January 15, 2009 19:47 EST

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