Woodside Suffers Setback in Hunt for Pluto 2 Gas

MELBOURNE (Dow Jones), Oct. 23, 2009

Woodside Petroleum has suffered a significant setback to its efforts to secure gas supply for the expansion of its Pluto project, with two potential suppliers opting to funnel gas to a Chevron Corp. project instead.

Apache Corp. and Kuwait Foreign Petroleum Exploration Co., or KUFPEC, have ended talks with Woodside and announced a deal to supply gas from their Julimar and Brunello discoveries off the coast of Western Australia to Chevron's Wheatstone liquefied natural gas project in return for a stake in the development.

Analysts said the failure to lock in this gas for Pluto's expansion was a blow to Woodside's plans and that the Perth-based group will now be depending more on exploration success to underpin the project.

Woodside said it is still in talks with other potential third party suppliers and that it has not changed its plans for the second stage of development at Pluto.

"This does not affect Woodside's previous advice in relation to the company's plans for an expansion of the Pluto LNG Project," Woodside said in a statement.

"Woodside remains in discussions with several third-party gas owners in the Carnarvon basin over the potential processing of their gas through Pluto."

Analysts said Woodside's ongoing talks on third party gas are likely to include discussions with Hess Corp. but that its gas reserves are further away than Apache's.

Woodside said it was beginning a drilling campaign in the Greater Pluto area of more than 20 wells this quarter and expects this to contribute to the expansion of the Pluto project.

Deutsche Bank oil and gas analyst John Hirjee said the loss of the gas to the rival Wheatstone development was a "significant setback" for Woodside.

"They will now have to rely heavily on exploration and on another third party deal, although the other options are probably not as mature as Apache's Julimar field," he said.

The A$12 billion first stage of the Pluto project, which will have annual production capacity of up to 4.3 million metric tons a year, is now 78% complete and is on track to produce its first gas early in 2011.

The heavy capital spend on the initial stage of the project means that the second stage expansion, featuring the addition of another 4.3 million tons per year processing train, is crucial to improving returns from Pluto.

At its half year result, Woodside said it would need about 2 trillion cubic feet, or tcf, of extra gas reserves from third party sources to underpin the second train.

The company needs 3.8 tcf of gas to underpin the second train and plans to get 0.4 tcf from acceleration of its existing Pluto and Xena gas fields.

That means it needs to secure the remaining 3.4 tcf from a mix of exploration and third party gas.

The Julimar and Brunello fields, with reserves of more than 3 tcf, would have gone a long way to meeting these needs.

Woodside has longer-term plans for a total of up to five LNG processing trains at Pluto, so will need a lot more third party gas to fuel its growth ambitions.

Front-end engineering and design work has already begun on both the second train, planned to start producing in 2013, and on the third train, planned to produce its first gas in 2014.

Neither Apache nor Woodside would comment on why their long-running talks over gas supply had foundered, but Woodside said its ongoing talks with third parties would be based on delivering "acceptable value to all parties".

The Chevron deal will see Apache take a 16.25% stake in the 8.6 million ton per year Wheatstone LNG project, with KUFPEC taking up an 8.75% stake and the pair to fund their share of the capital cost of the project.

First Quarter Output Down 5% On Year, Up 6% On Quarter

Woodside also posted third quarter oil and gas production of 20.6 million barrels of oil equivalent on Friday, down 5% on year from 21.7 million barrels a year before due to natural field decline.

However, the production was 6% higher than during the second quarter, when Woodside produced 19.4 million barrels, and the company said this was due to the startup of the Corallina 2 development well at Laminaria-Corallina and improved performances at Vincent and Enfield.

Deutsche's Hirjee said the production had come in ahead of his expectations and the improved uptime at Vincent and Enfield was positive.

Sales revenue for the quarter was down 40% on year to A$1.1 billion, but this was still up 13% on the second quarter as a recovery in oil prices and higher sales volumes outweighed adverse movements in the Australian to U.S. dollar exchange rate.

Woodside maintained its full year production forecast for between 81 million and 86 million barrels of oil equivalent.

News of the Apache gas deal with Chevron sent Woodside's shares lower, and at 0222 GMT they were down 1.5% at A$51.94 in a broader Australian market up 1.0%.  

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