Historic decisions are inextricably linked to today’s much more difficult climate for oil and gas producers as the world collectively strives to achieve carbon neutrality to prevent catastrophic climate change, an effort that has taken extra momentum at this month’s COP26 summit in Glasgow.
Strengthening through the merger of BHP Petroleum is a strategy almost imposed on Woodside by the increasing pressures exerted on his company from multiple angles by climate change and the rise of environmental, social and governance issues to the order of the day of investors, financiers and other stakeholders.
Oil and gas producers around the world, including Santos and Oil Search in the local market, are looking to scale, diversity and a stronger balance sheet to meet the challenges of the clean energy transition.
Woodside’s geographic reach will expand, its product line will diversify, its reserves will double and its balance sheet will strengthen, also driven by more than US $ 400 million in annual merger synergies. Alignment will also increase in the Scarborough business and the North West Shelf business, in which both have stakes.
“You have a very good range of growth assets, you can select the best assets and you get better cash flow from the combined assets,” says Woodside investor Romano Sala Tenna at Katana Asset Management.
“And when you’re much bigger, you can also invest more money in the transition to hydrogen and the like, and to green energy. For all of these reasons, a merger makes a lot of sense from Woodside’s point of view. “
The race to net-zero emissions creates a much more difficult environment to move forward with Scarborough, amid the heated debate over the role natural gas can play in the transition to low-carbon energy.
As the window quickly closes on new fossil fuel developments, if the vast 11.1 trillion cubic foot Scarborough field located 375 kilometers off the coast of Western Australia is not developed now it may never be.
“In an accelerating energy transition, Pluto T2 could be Woodside’s final final investment decision in LNG,” said Macquarie Equities, referring to the expansion of the Pluto LNG plant in Woodside near Karratha where the Scarborough gas will be processed and that is part of the larger project.
The origins of Woodside can be traced back to the sole acquisition by Rees Withers, accountant from Melbourne, held a Gippsland permit on Victoria’s Ninety Mile beach after Australia’s first commercial oil strike in 1953 at Rough Range in the Exmouth Basin of WA.
Donors to a syndicate that funded its work were granted the right to buy shares in Woodside (Lakes Entrance) Oil, then underwritten by Melbourne brokerage firm Geoff Donaldson.
The transfer of its hunt for oil to Western Australia years later led to the discovery of gas on Scott Reef, 400 kilometers north of Broome in 1971. A huge field of gas and condensate from North Rankin was discovered on the Northwest Plateau, followed by Goodwyn in 1972, setting Woodside on the path of a small explorer to the country’s largest independent oil and gas company and sparking a new LNG industry.
After signing the first sales agreements with Japanese gas buyers in 1985, the new North West Shelf company eventually expanded to five LNG production trains at its Karratha site, operated by Woodside alongside major partners. Shell, BP, Chevron, BHP and Japanese MIMI.
Nine more LNG projects have since been built in Australia, supporting a lucrative and world-leading export industry expected to be worth $ 56 billion this fiscal year.
On the corporate front, Woodside was saved from extinction by then Federal Treasurer Peter Costello in 2001 when he intervened to prevent longtime shareholder Shell from taking control. Some 13 years later, Woodside has grown into a fully independent local oil and gas giant as his former suitor took a different path and got out.
Voelte’s Pluto plane
It was the strained relationship between the partners of the North West Shelf business – later dubbed a ‘goat rodeo’ by former Shell Australia manager Ann Pickard – that led then-CEO Don Voelte to 2007. , to forge a new LNG path for Woodside via its own Pluto LNG. project, using gas which, more logically, should have been destined for the company’s plant.
Two drops in oil prices later, Woodside is finally proceeding with the expansion of Pluto that Voelte had anticipated at least a decade earlier.
After several lean years on the exploration front, Woodside’s Pluto-2 project relies instead on a field discovered by Exxon and BHP 42 years ago in which it bought in 2016 under the CEO of the Peter Coleman era, and was once designed as a floating LNG project. .
With Woodside’s other potential LNG projects – notably Sunrise in the Timor Sea and Browse off the Kimberley Coast – stagnating over the years and overseas incursions, including Mauritania, the United States and Abandoned Israel, Scarborough and the larger ‘Burrup Hub’ concept for gas development designed by Coleman has become a central part of the growth strategy.
This is not lost on investors, who are encouraged by returns from projects which were boosted to over 13.5% thanks to Woodside’s deal earlier this month with state-based Global Infrastructure Partners. United, which will buy a 49% stake in Pluto-2. expansion project.
This cuts the payback period of the Scarborough project for Woodside to just six years, which consultancy firm Wood Mackenzie says is “decades” shorter than for the latest wave of LNG construction projects in Australia. .
“The returns they’ve generated in the market look good,” said Suhas Nayak, portfolio manager at longtime Woodside investor Allan Gray.
“And, of course, there’s still some risk between now and actually seeing those returns, but at first glance it looks good. It is an important resource and it underpins the production of the company for many years.
However, some are still concerned about Woodside’s commitment to pursue Scarborough with a 100% effective stake in the offshore field given that its only partner is BHP with a 26.5% stake which will shift to Woodside with the merger. A sale process by Woodside to bring in a partner who would likely also purchase LNG from the project is still ongoing.
Going forward with such a high percentage of equity in a project worth over $ 10 billion is “very unusual,” said Mark Samter, analyst at MST Marquee.
“The closest we got was 90% Pluto, and history probably didn’t judge this project too nicely,” he told O’Neill on a teleconference last week, saying reference to cost overruns and delays in the original construction of Pluto LNG.
Woodside also faces ongoing legal challenges over environmental approvals for parts of the project and escalating opposition from those who believe the new gas supply conflicts with net zero emissions targets.
O’Neill insists the very low 0.1% CO2 content of gas from the Scarborough reservoir means the project aligns with Paris climate goals and highlights the role gas will play in key markets Asian LNG from Woodside in reducing emissions by replacing coal.
CO2 emissions over the 30-year life of the project will total 878 million tonnes, not the 1.6 billion tonnes claimed by activists, according to the company.
This is not an argument that activist investors like, although their opposition to Scarborough finds little political support, with the government and Labor strongly in agreement, citing the ripple effect on the economy of investment, including a $ 125 billion GDP boost – over 3,000 construction jobs and an expansion of LNG exports. Both say that the project is part of the process of decarbonisation.
Losing ground in the gas
Any significant expansion of Australian LNG exports, however, is not an option, given the dwindling gas supplies to existing plants, including the Karratha gas plant of the North West Shelf company, which some saw as a more popular destination. optimal for Scarborough gas.
With Scarborough now off the table as a source of new gas and the development of the Woodside’s Browse gas fields that could have effectively fueled it at a standstill, the North West Shelf business plans to have to start shutting down one of its five LNG production trains in 2024. The agreements concluded to process third-party gas only temporarily postpone the drop in production.
“The Northwest Shelf is already off the shelf as upstream supply decreases,” said Michael Song, research analyst at Wood Mackenzie, who predicts LNG demand will continue to grow through the late 2030s. under a two degree temperature change scenario.
“If a large backfill field is not sanctioned, production at the facility could cease in the mid to late 2030s.”
In fact, unless new gas fields are developed to help fill the 10 existing LNG plants in Australia, Australian LNG exports will likely be nil in 2050, well below the federal government’s modeling, said Graeme Bethune, CEO of consulting firm EnergyQuest.
As LNG demand in Asia looks robust for the next several decades, even as countries aim for net zero emissions, Australia appears poised not to capitalize on its huge investment in LNG infrastructure due to a lack of investment in a new gas supply, said Dr Bethune, meaning its ranking as the world’s largest exporter of LNG will likely be short-lived.
Rival LNG exporters such as Qatar and the United States have many more new LNG projects in the planning stages, he noted, highlighting Qatar’s planned expansion of capacity to 110 million tonnes per year against 77 million, and 11 North American projects in planning. This compares to the only Scarborough and Santos Barossa gas project off the northern coast of Australia, which will extend the life of Darwin LNG.
“The industry of these countries [US, Qatar] don’t wait to see what will happen by 2050, ”said Dr Bethune. “They are working on how to keep delivering LNG, but a lot less emissions or carbon neutral LNG.”