By Ross Kelly 

SYDNEY-- GDF Suez SA and Santos Ltd. backed away from a multibillion-dollar plan to develop natural gas fields offshore Australia using untested technology that can convert gas to a liquid at sea.

The decision highlights the risks confronting Australian gas-export projects as they grapple with high costs and competition from North America and Russia, which are vying to provide Asian utilities with cleaner-burning fuels. It is also a sign that confidence in floating liquefied natural gas may be diminishing--two years before a Royal Dutch Shell PLC-owned vessel is due to begin processing gas for the first time.

A floating LNG project "doesn't currently meet the companies' commercial requirements", GDF Suez and Santos said in separate statements Thursday. The pair said they would look at other ways to develop the Petrel, Tern and Frigate gas fields in the Bonaparte Basin, including piping gas to an onshore processing facility in Darwin around 170 kilometers away.

Vessels that can convert natural gas to a liquid at sea have long captured the imagination of some of the world's biggest energy companies because they allow for the development of relatively small fields stranded hundreds of miles from shore. Developing natural gas fields currently involves construction of expensive pipelines to the coast, where large plots of land must be cleared to accommodate processing hubs.

A major technical issue for floating LNG, however, is to design a liquefaction and storage system that can cope with the movement of the ocean, especially in stormy weather. That issue is being addressed with containers designed to minimize sloshing and with elaborate anchoring systems designed to minimize the movement of vessels in the water.

Shell approved construction of the world's first floating LNG vessel in 2011 to process gas from the Prelude field, also located off Australia's northern coast. The giant vessel--longer than four soccer fields when laid end to end--is being built in a South Korean shipyard and is scheduled to start producing LNG in 2016. Exxon Mobil Corp. and BHP Billiton Ltd. are also considering using floating LNG to develop remote gas fields.

Still, budget overruns at several Australian LNG developments have underscored the risks involved in building new projects. Woodside Petroleum Ltd. last year shelved plans to build an onshore plant to process gas from its deep water Browse field in Western Australia state because it wasn't commercially viable.

Shell has estimated its Prelude project will cost up to $3.5 billion for each million tons of production capacity, indicating a total cost of up to $12.6 billion.

GDF Suez in 2010 paid Santos up to US$370 million to join the project, known as Bonaparte LNG. The deal included an upfront cash payment of US$200 million for 60% of the three gas fields.

The company agreed to pay Santos an additional US$170 million when a final investment decision was made on the proposed floating LNG facility. Bonaparte LNG was slated to produce between 2 million and 3 million metric tons of LNG each year. Santos was previously aiming to begin construction in 2014, with delivery of first cargoes around four years later.

GDF Suez--Europe's largest utility by market value--is looking to sell assets worth as much as EUR11 billion (US$14.4 billion) by the end of 2014 to boost its balance sheet at a time when weak euro-zone growth is hurting energy demand and French regulators are restricting its ability to raise natural-gas prices. The French company is also involved in proposed LNG projects in the U.S. and Cameroon.

Write to Ross Kelly at ross.kelly@wsj.com

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