Origin Energy Ltd. (ORG.AU) and joint venture partner ConocoPhillips (COP) are considering halving the size of the foundation stage of their liquefied natural gas project in Queensland state due to a regional oversupply of the fuel, Citigroup analysts said Tuesday.

Origin declined to comment on the Citigroup report, which also said that the joint venture could be left targeting Chinese and Indian LNG buyers after Japanese buyers it was initially courting ended up signing deals with rival Australian LNG projects.

Around a dozen of the massive developments, four of them in Queensland state, are slated for startup in Australia and Papua New Guinea by 2016. They are all attempting to tap a projected surge in demand for cleaner-burning fuel from Asia. Most analysts, however, are concerned that there's too many projects and that finding customers could prove tough for some.

Origin and ConocoPhillips have superior gas reserves to the three rival developments in Queensland but they're the only Queensland development that hasn't signed any customers yet.

At its Aug. 24 full year results briefing, Origin appeared to relax an end-of-2010 final investment decision target for the project, called APLNG, saying that although regulatory and technical issues are expected to be resolved by that time, major construction won't commence until a customer is found.

While "comfortable and confident" about the status of customer negotiations, Origin Chief Executive Grant King said at the time that finding buyers is proving more challenging than the market had anticipated two years ago, with some potential buyers leaving the negotiating table and some remaining.

LNG customers traditionally take a small stake in the LNG projects they're buying LNG from. Citigroup said ConocoPhillips is unlikely to sell project equity to an LNG customer at a material discount to the price it paid for its 50% interest in the development in 2008, potentially holding up any offtake deals.

Santos Ltd. (STO.AU), which is involved in a rival Queensland development, recently sold equity in its project to France's Total S.A. (TOT) but at a significant discount to what it sold a separate stake in the project for in 2008, when oil prices were almost twice as high as they are now.

ConocoPhillips already sells gas to Tokyo Gas Co. (TKGSY) and Tokyo Electrical Power Co. (9501.TO), or Tepco, from an Alaskan LNG plant but the two Japanese companies have recently agreed to buy additional gas from rival Australian projects.

Tepco is buying LNG from the Chevron Corp.-operated (CVX) Wheatstone project and Tokyo Gas signed an offtake pact with BG Group's (BG.LN) Queensland development.

"While we think Tokyo Gas is still in the market for LNG, we are not sure whether it will be interested in taking more coal seam gas LNG into its portfolio," Citigroup said, noting that the Queensland LNG projects are all using coal seam gas, an unconventional fuel with a slightly lower calorific value than traditional natural gas.

Korea Gas Corp. is currently talking to Santos and Royal Dutch Shell Plc (RDSB.LN) about offtake and Taiwan is likely to look at the Browse and Ichthys LNG projects, Citigroup said.

"We think the most likely target customers for APLNG are in China and India," Citigroup said.

It added, however, that PetroChina Co. (PTR) and CNOOC have already signed with rival developments, leaving Sinopec as a likely potential target customer and Indian companies like Petronet.

"APLNG was previously targeting a 2-Train FID, however given the challenging market environment we expect it is more realistic for APLNG to FID a single train development by mid-2011, to produce first LNG in late 2015," Citigroup said.

The broker kept a buy recommendation on Origin's shares, given the size and quality of its gas reserves and the fact investors are already attributing little value to APLNG. At 0313 GMT, Origin shares are down 0.4% compared with a 0.8% fall in the benchmark S&P/ASX 200.

-By Ross Kelly, Dow Jones Newswires; 61-2-8272-4692; Ross.Kelly@dowjones.com
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