Low oil prices and weak market fundamentals have put paid to Woodside Petroleum's immediate plans to develop a major LNG project based on its Browse Basin gas fields, offshore northwestern Australia.
Woodside said Wednesday that the Browse joint venture had "decided not to progress with the development at this time considering the current economic and market environment."
World LNG markets are currently in oversupply and crude oil-linked prices have crashed.
Demand for LNG in North Asia has been soft at a time when supply has been increasing with the recent startup of the Queensland Curtis, Gladstone, Australia Pacific and Gorgon LNG projects in Australia, and Sabine Pass in the US.
"While part of the decision to defer relates to cost, it also reflects the challenging LNG market environment," Bernstein Research analyst Neil Beveridge said in a note.
Buyers are currently deferring decisions on long-term LNG contracts, although Beveridge said he expected the market to open up again in 2018, given the longer-term supply tightness that is building up as projects are suspended or delayed.
"[Woodside's decision] also reflects a more competitive pricing environment given US LNG exports which will be Henry Hub-linked," Beveridge added. "This will potentially force suppliers into flatter pricing structures which have less upside to high oil prices in the future."
Buyers in Japan, the world's biggest consumer of LNG at just over 85 million mt in 2015, have championed a switch away from crude oil-linked LNG pricing in recent years.
They have even suggested that future LNG supplies from Australia might be priced against coal or electricity.
FLNG STILL NOT COMPETITIVE ON COST: ANALYST
The decision to shelve the Browse project was made following completion of front-end engineering and design work on a floating LNG project at the offshore gas fields.
The FEED phase of the project, which would have involved the construction of three FLNG facilities producing 3.6 million mt/year each, began in June 2015 and the joint venture had previously been targeting a final investment decision on the project in the second half of 2016.
Woodside said that since entering into FEED, it has focused on cost savings and value enhancements for the project, which local observers expected to cost around $40 billion.
Although significant progress was made to improve project value, this has been offset by an extremely challenging external environment, the company said.
"Woodside remains committed to the earliest commercial development of the world-class Browse resources and to FLNG as the preferred solution, but the economic environment is not supportive of a major LNG investment at this time," Woodside CEO Peter Coleman said in a statement.
"We have undertaken a comprehensive and rigorous process to assess all elements of the development," Coleman added.
"The decision represents a disciplined approach to large-scale capital investment and is consistent with our requirements for a development concept to be commercially robust across a range of scenarios."
Coleman said Woodside would now pursue further capital efficiencies for the project and "work with the Browse joint venture participants to prepare a new work program and budget to progress development activities."
The company said it would consider a range of concept options for Browse.
"The decision not to move forward with FLNG suggests the costs are not yet low enough and efficiencies not yet high enough to compete with conventional LNG developments other than in niche settings," according to Bernstein's Beveridge, who predicted that the Browse gas would remain in the ground for another decade.
The Browse FLNG facilities were to be based on Shell technology, which is being pioneered for the nearby Prelude project, scheduled to startup in 2017.
QUESTIONS OVER WHERE SHELL WILL DEPLOY FLNG
"While there are seven FLNG projects in the world under development, this decision is likely to slow enthusiasm for the technology. With Shell having three FLNG vessels on order, the question is where these will be deployed."
Shell's massive Prelude FLNG facility is currently under construction in South Korea. Prelude is the first of the "design one build many" FLNG facilities envisaged by Shell under a 15-year contract the company signed in July 2009 with a consortium of Technip and Samsung Heavy Industries.
The Browse retention leases were renewed in 2015 and the current term of the leases ends in mid-2020.
The leases cover the Torosa, Brecknock and Calliance gas fields, which together hold contingent resources totaling 16 Tcf of gas and 466 million barrels of condensate.
Woodside holds 30.6% of the Browse project. The other partners are Shell (27%), BP (17.33%), Mitsui and Mitsubishi's Japan Australia LNG (14.4%) and PetroChina (10.67%).
The Browse project was originally conceived as an onshore development at James Price Point on Western Australia's remote Kimberley coast. But that option was ruled out in 2013 after Woodside determined that the development would cost around $80 billion.
Australia is coming to the end of a $200 billion construction boom in its LNG industry, which will eventually see the nation producing nearly 87 million mt/year at 10 projects, seven of which will have started up between the end of 2014 and 2017.
Browse was the only major new LNG project being considered in Australia, although growth options are still under assessment in Papua New Guinea, at both the producing PNG LNG and proposed Papua LNG.
