The rosy glow around liquefied natural gas projects engendered by the go-ahead of the A$43 billion Gorgon gas field development in Australia is rubbing off on Woodside Petroleum Ltd. (WPL.AU).

Shares in Australia's biggest pure-play oil and gas producer have outperformed the wider S&P/ASX 200 index since Sep. 14, as investors bought the stock for more exposure to the LNG market and booming Asian demand for clean fuels.

Woodside is betting big on LNG - a natural gas cooled to a liquid form so it can be moved by ship - and is planning to build three new multibillion dollar LNG projects.

Research firm Poten & Partners says all three could make Woodside the world's second-largest LNG producer by 2018.

However, Woodside must overcome major hurdles to bring its project pipeline to fruition. It is also facing a battle for customers as a raft of rival LNG plants are in the works, including Gorgon.

Among Woodside's biggest challenges: securing enough feed gas to justify investments; friction with partners that have competing Australian LNG projects; and building a political consensus for its plan to develop a gas field in the Timor Sea.

Perth-based Woodside's shares were trading mid morning Thursday at A$52.84, having recovered to year-ago levels, but well below a A$70.51 peak in May last year.

UBS says Woodside's annual LNG production could reach 20 million metric tons before 2020, up from 2.7 million tons currently. A near-term jump in LNG output will come from the first phase of the Pluto project offshore Western Australia coming on stream in late 2010, but much hinges on expansions at Pluto and developments of Browse and Sunrise.

Each project would lift Woodside's earnings and revenue - sales of North West Shelf LNG contributed a quarter of the group's A$6.0 billion revenue in 2008.

Woodside's plans are closely watched as its projects could capture much of the outstanding demand for LNG in the Asia-Pacific region.

Conventional LNG projects such as those proposed by Woodside appear favored by customers, so any new supply could hit the marketing efforts of competitors pioneering technology that converts coal seam gas to LNG.

"Selling gas from Pluto or North West Shelf from Woodside is different than a newbie who has never proven themselves before, and your sophisticated customers in Japan, Korea, Taiwan and other places, they certainly look for that," Chief Executive Don Voelte said on a conference call in August.

Woodside doesn't have enough gas to expand Pluto beyond its first phase, meaning it will need third-party supply or new exploration success. Woodside owns 90% of the project.

"The market needs visibility on where these molecules will come from," says Citigroup.

Voelte is upbeat on prospects of expanding Pluto. Due diligence and negotiations are "well advanced" with two potential third-party gas providers, he said in August, and the company plans to make a final investment decision on Pluto 2 by late next year and Pluto 3 by 2011.

The cost of any third party gas offer will be crucial to determining the value of the expansion to Woodside's shareholders.

The company faces a different challenge with Browse: getting project partners to agree on a development plan.

Woodside and the government of Western Australia want the gas to be piped to an LNG hub in the state's Kimberley region.

But partners at Browse, including Chevron Corp. (CVX) and BHP Billiton PLC (BHP), think piping gas to the North West Shelf may be better as the plant's existing supply is due to run out toward the end of the next decade.

"Both options need to be assessed and understood thoroughly so that quality development decisions are made," Roy Krzywosinski, Chevron Australia's Managing Director, said in June.

Voelte says the Australian government could lean on the project partners to develop the gas sooner rather than later by threatening to strip them of their gas retention leases.

Developing the Sunrise LNG project is also complicated as it will take gas from the Greater Sunrise field, which straddles the border between Australia and Timor Leste.

Voelte says Woodside will decide by Dec. 31 if it will process the gas through an expansion of ConocoPhillips' (COP) existing LNG plant at Darwin, or from a floating LNG facility. He's threatened to float the project in Timor Leste waters to avoid the Australian government's proposed carbon emissions trading scheme.

The hitch is that Woodside needs approval from the Timor Leste and Australian governments to develop the gas.

Timor Leste would like the gas to be piped onshore and processed in its country - a position its resources minister reiterated at a Darwin conference last week.

"We are in kind of a ticklish period with everybody on this thing," Voelte says. "But, at the end of the day, it is a good project that provides a hell of a lot of revenue to both countries."

Copyright (c) 2009 Dow Jones & Company, Inc.