MELBOURNE (Dow Jones)

Woodside Petroleum Ltd. (WPL.AU) has lost a foundation customer for one of its key growth projects with the expiration of an agreement to potentially sell up to 3 million tons of liquefied natural gas a year to PetroChina Co. (PTR) from the Browse development.

The Perth-based company said Monday the agreement expired on Dec. 31 but that a separate agreement with Taiwan's CPC Corp. remains in place and that it is also in talks with Japan's Osaka Gas Co. (9532.TO) over possible sales of gas from Browse in Western Australia state.

PetroChina signed a key terms agreement on Browse gas sales with much fanfare in 2007, and the failure to convert that agreement into a firm supply deal is a blow to a project that is central to Woodside's ambitious LNG growth plans.

"Woodside and PetroChina have agreed to keep each other informed of progress in their respective LNG export and LNG import projects," Woodside said in a statement.

"Woodside remains in ongoing discussions with other Asia-Pacific LNG customers in relation to potential sales from its portfolio of Australian LNG developments, including the Browse project."

PetroChina Chief Financial Officer Zhou Mingchun declined to comment on the reasons for the state-owned group's decision to allow the agreement to expire.

The failure of the PetroChina deal is a lost opportunity for Woodside to lock in gas sales to the booming Chinese market, but Goldman Sachs JBWere oil and gas analyst Aiden Bradley said it was possible Chinese buyers could return when Browse is at a more advanced stage.

Woodside said a key terms agreement struck with CPC in November 2007 remains in place and it continues good faith negotiations with CPC on a detailed supply agreement.

The Perth-based group also said it has entered an agreement with Osaka Gas to push forward talks on Woodside projects, including the potential sale of up to 1.5 million tons of LNG a year from Browse.

However, a person close to the situation downplayed the significance of the talks.

"This is one of many talks held (by Osaka Gas) with potential sellers," and he doesn't understand why Woodside mentioned Osaka Gas in the statement, because the talks "are not anywhere near the level where Osaka Gas normally discloses details" such as the 1.5 million-ton level, the person said.

Woodside's partners in the Browse joint venture are Chevron Corp. (CVX), BHP Billiton Ltd. (BHP), BP PLC (BP) and Royal Dutch Shell PLC (RDSB.LN).

The Browse partners have been locked in a wrangle over where to site the gas processing plant, but the project regained momentum in December when they agreed to a government deadline to settle on a site.

The partners are now targeting a final investment decision on Browse by mid-2012.

Browse is competing with a number of major LNG projects slated for development in Western Australia, including the A$43 billion Gorgon project and Chevron's Wheatstone development, as well as numerous coal seam gas-based projects in Queensland state.

Goldman Sachs JBWere's Bradley said it was not surprising to see the PetroChina agreement lapse since there were still so many unanswered questions about the development of Browse.

"No one is going to go to a firm agreement on Browse gas; it would be madness at this early stage," he said.

The lack of expectation of a firm Browse gas sales deal meant the news had little impact on Woodside's shares, which were up 0.9% at 0240 GMT as oil and gas stocks made gains in a broader Australian market up 0.3%.

Bradley said one of the challenges for the project was that Woodside's project partners saw it as further down their lists of planned LNG developments.

Other challenges were the disagreement over site selection, rising costs, carbon dioxide emissions, uncertainty over the upstream asset and competition from better projects, he said.

(Yvonne Lee in Hong Kong contributed to this story.)

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