Woodside Petroleum puts the Browse floating LNG project on indefinite hold

Low commodity prices have claimed yet another project this week. Woodisde Petroleum (ticker: WPL) announced that it will put its Browse floating LNG project on hold indefinitely as low commodity prices make it more difficult to justify the project.

“While significant progress was made to improve project value, this has been offset by an extremely challenging external environment,” Woodside said in its press release.

The $40 billion project, which included Royal Dutch Shell (ticker: RDSB) and BP (ticker: BP) as partners, hoped to use floating LNG processing ships in order to produce from the 16 Tcf of gas located about 264 miles off the coast of Western Australia in the Browse Basin.

“Woodside remains committed to the earliest commercial development of the world-class Browse resources and to FLNG as the preferred solution,” said Woodside CEO Peter Coleman, “but the economic environment is not supportive of a major LNG investment at this time.”

Mitsui, another partner in Browse, said it would take a 40 billion yen (about $357 million) impairment charge on the project. David Nicholas, a BP spokesman, said the company was in agreement with Woodside on delaying the project, reports The New York Times.

LNG buyers rethinking contracts

The tremendous capital investment required to get an LNG project off the ground made sense when demand was growing, particularly in Asian markets, and cargoes on the spot market were receiving as much as $20 per MMBtu. Today, however, demand is lagging and the global glut has left LNG buyers in a much stronger position than when they originally negotiated the long-term contracts associated with LNG projects like Browse.

In December, Indian importer Petronet LNG worked out a new pricing formula for an exisiting 25-year deal with Qatar’s RasGas, cutting the price significantly, reports The Wall Street Journal. And last month, the chairman of China National Petroleum said his company might renegotiate existing long-term contracts which were signed when demand outpaced the available supply.

Woodside looking to use saved capital for acquisitions

Woodside’s CEO did mention that the company’s decision would leave it in a stronger position to pursue other options, though. Coleman said that by not moving forward with Browse, more capital would be freed up to go after “attractive” assets, reports Sydney Morning Herald. He even signaled that possible acquisitions would take priority over returning capital to shareholders.

A share buyback “is attractive in some respects but it’s also maybe … preventing you from pursuing opportunities that only come up once every 10 years or so in the cycle,” he said.