Australia's Woodside Petroleum Ltd said on Thursday it is considering locating its Sunrise liquefied natural gas (LNG) project in East Timorese waters to avoid the potential costs under Australia's proposed carbon trading scheme.

Woodside, Australia's second-largest oil and gas producer, said if the venture partners decide to develop the Sunrise gas field as a floating LNG project, the ship could be located in an area jointly administered by Australia and East Timor, rather than in Australian waters, which would also result in lower royalties.

Woodside Chief Executive Don Voelte said the multi-billion dollar project "could be the first project Australia loses" because of the country's proposed carbon trading system, which does not give free carbon credits to LNG producers under its current design.

Australian LNG exporters have been lobbying the government vigorously to be either excluded or compensated from the carbon trading scheme, saying that they won't be able to compete with overseas competitors who don't have to pay for carbon emissions.

Speaking at an investor briefing, Voelte said having the LNG ship away from the Australian waters was also an attractive option because of lower royalties. Downstream royalties in East Timor are just 10 percent, compared with 40 percent in Australia.

Woodside, 34 percent owned by Royal Dutch Shell, won't decide until next year whether it will build a floating LNG plant, using Shell's technology, or build the plant onshore in Darwin.

Voelte said the floating LNG option would limit production capacity to about 3.5 million tonnes per annum, while an onshore plant built in Darwin could have a capacity of 4.8 mtpa.

Woodside, operator of the proposed Sunrise LNG project, has about 33 percent stake in the development, while ConocoPhillips , Shell owns 27 percent and Japan's Osaka Gas Co has 10 percent.

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