-- Lower net profit of US$812 million reflects costs incurred in Pluto start-up

-- Drilling to support Pluto expansion disappoints, to halt program for now

-- Upgrades 2012 production target to 77 million-83 million BOE

(Recasts lead, adds background on LNG industry and Woodside project portfolio in fifth-eighth paragraphs, CEO quote in ninth paragraph, share price reaction in 13th paragraph)

 
   By David Winning

SYDNEY--Woodside Petroleum Ltd.'s (WPL.AU) hopes of capitalizing on booming Asian demand for natural gas by expanding its flagship Pluto export terminal in Western Australia has been dealt a major blow after a drilling campaign failed to find enough new reserves.

Woodside is now banking on talks with rival companies with natural gas discoveries nearby the 14.9 billion Australian dollar (US$15.6 billion) Pluto project to support an expansion, after it said Wednesday it will pause its own drilling program and seek new exploration blocks.

The downbeat outlook for expanding Pluto came as Woodside--Australia's second-largest oil and gas producer by output after BHP Billiton Ltd. (BHP)--reported a 1.9% decline in net profit to US$812 million for the six months through June 30. The earnings decline largely was due to Woodside needing to buy cargoes of liquefied natural gas, or LNG, to fulfil contracts with Japanese customers after an earlier delay to commissioning Pluto.

However, Woodside sounded a positive note on production after Pluto outperformed expectations since April and it rescheduled maintenance at the Vincent oil field to next year. It now expects to produce between 77 million and 83 million barrels of oil equivalent this year, up from earlier guidance of up to 81 million BOE.

Rapid industrialization in Asia and global concerns over climate change are transforming the energy industry, prompting companies like Woodside and ExxonMobil Corp. (XOM) to bet billions of dollars on natural gas playing a critical role in meeting the world's future energy needs.

Pluto is Australia's third operating LNG plant after the Woodside-led North West Shelf project and ConocoPhillips's (COP) Darwin LNG project, and there are at least eight more gas-export plants planned along Australia's coastline at a combined cost of more than US$175 billion.

The investment boom puts Australia on course to overtake Qatar as the world's biggest exporter of LNG by the end of the decade. But it's also heaping pressure on an already stretched resources services sector as LNG projects compete with big mining developments in Queensland state and Western Australia for pipe layers, welders and engineers.

In addition to Pluto and the North West Shelf, Woodside wants to lead development of two other huge LNG projects--Browse, which analysts think could cost around US$30 billion, and Sunrise, a gas resource that straddles the territorial waters of Australia and East Timor.

Because of the high fixed costs in acquiring land and installing infrastructure on site, energy companies typically can generate higher returns on investment by adding processing units, or trains, to LNG facilities already built.

"With regard to Pluto expansion, the current phase of exploration drilling to support additional trains has concluded without discovering the volume of commercial gas that is required to endorse a final investment decision at this point in time," Peter Coleman, Woodside's chief executive, said in a statement to the Australian Securities Exchange.

Competing projects such as Gorgon and Wheatstone--both operated by Chevron Corp. (CVX) and under construction--aim to expand capacity in stages to as much as 25 million tons of LNG a year each. In comparison, Pluto is currently much smaller with a single processing unit capable of producing 4.3 million tons of LNG annually.

Woodside said its underlying profit, which is closely watched by analysts because it strips out one-off items, rose 4.5% to US$865 million in the first half. That was lower than the US$885 million average of seven analyst forecasts compiled by Dow Jones Newswires.

Under Mr. Coleman, Woodside is also looking to reduce its reliance on Australia for growth by securing exploration acreage overseas.

Woodside has joined a consortium bidding for exploration rights offshore Cyprus, with the outcome expected by the end of this year, and said Wednesday it has begun a "series of global basin studies".

"As part of this review Woodside is currently examining opportunities in the Eastern Mediterranean, South East Asia and the Americas," the Perth-based company said.

At 0205 GMT, Woodside shares were down A$1.08, or 3%, at A$34.92.

-Write to David Winning at david.winning@wsj.com

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