Browse realisation growing

ASIAN face meets Australian spin. That is how Slugcatcher saw Friday's surprise announcement that another customer had walked away from the Woodside Petroleum-led syndicate trying to develop the $40 billion Browse LNG project in the far north of Western Australia.

While the withdrawal of Taiwan's CPC Corp was played down by Woodside as a sort of "ho hum" event, the reality is Browse is fast becoming a project no one wants.

Frightening investors and customers is the sky-high cost of the Browse development, as proposed, plus the potential for a big cost blowout of the sort that has become routine in the Australian LNG industry - followed by the certainty of the higher capital cost flowing into a higher LNG price.

Boiled down, Browse is becoming too expensive for its owners and customers and that is before the issues of environmental objections and indigenous land rights are considered.

The only people who seem to be cheering on Browse are the WA government - which is demanding Woodside comply with state agreements it has signed - and senior management at Woodside, though that's not absolutely certain given the way CPC was allowed to walk out the door.

The loss of CPC follows the earlier departure of PetroChina, which abandoned its LNG purchase agreement with Woodside in 2010.

From being a project with three cornerstone customers - Mitsui and Mitsubishi of Japan are the third (unless they too are preparing to walk away) - Browse is an LNG development facing a huge sales job at a time of a looming LNG glut.

One of the keys to what's happened is that customers who signed preliminary LNG purchase agreements in 2007 are taking a fresh look at the overall market and discovering they can get what they want elsewhere at a cheaper price.

Woodside (naturally) did not say that, though everyone with a little shopping experience knows the reason you walk out of a store is invariably because the goods on display are substandard, overpriced, or both.

Saving face as you head for the exit is generally accompanied by a polite thanks to the staff behind the counter and a promise to come back later - with both sides knowing the comment is far from the truth.

It was pretty much what happened on Friday when Woodside announced the CPC deal had died with "face" saved for the Taiwanese customer bolting out the front door by the Woodside shop assistants declaring the exit was a mutually agreed decision.

In what must rate as the most costly statement ever filed (on a per word basis) at the Australian Securities Exchange, Woodside took 41 words to say a $45 billion deal had collapsed - roughly one word for every $1 billion foregone.

The official reason, as created by Woodside's PR department, was to say the CPC deal had been "allowed to expire" on the agreement of both parties.


Someone at Woodside, presumably sitting close to the office of chief executive Peter Coleman or chairman Michael Chaney (if he's returned from his European vacation) agreed without a fight to allow a second customer to walk away from a deal to buy Browse gas.

It was a very different story back in November 2007, when Woodside excitedly announced the original deal with CPC.

Back then, the man in charge at Woodside Don Voelte said the CPC deal: "recognised the quality of Woodside's Australian LNG portfolio and emphasised the company's position as an LNG supplier of choice in the Asia Pacific region".

When announced, the CPC deal helped lift Woodside shares by 1.5% to $47.56.

On Friday, the end of the CPC deal, Woodside shares fell 2.2% to $31.36, roughly double the rate of decline of the overall market.

While there are undoubtedly good reasons for CPC to walk away from the 2007 deal, given it was signed in a totally different commercial environment, there is a nagging suspicion in The Slug's mind that Woodside might also be happy to see the contract collapse.

It is those words "on the agreement of both parties" that hints at Woodside getting something out of what looks like failure.

Now, what could it be?

Is it possible Woodside and its Browse partners are looking for a reason to apply for an even longer extension to the retention leases held over the Browse gas fields?

In April, the Browse partners won an extra 12 months to make a final investment decision on Browse, with a mid-2012 deadline extended to the first half of 2013.

With customers disappearing out the door there is a perfectly valid reason to ask for more time because no government will try to enforce an agreement if the project proponents can show there are not any customers.

Perhaps that line of thinking is too Machiavellian but we are dealing with an interesting combination of Asian face and Australian spin.