By Peter Milne
Woodside shareholders will soon vote on adding BHP’s petroleum assets to its business to create a $60 billion oil and gas giant in the top 10 of Australian companies.
If, as expected, the deal is approved at Woodside’s May 19 annual general meeting, BHP’s shareholders will be issued new scrip for 48 per cent of the enlarged company.
The scope and cost of decommissioning oil and gas platforms and pipelines in the Bass Strait is a question mark over Woodside’s purchase of BHP Petroleum. Credit: ExxonMobil Australia
BHP chief executive Mike Henry is close to extracting his diversified miner from the increasingly contentious fossil fuel business to focus on what he calls future-facing commodities that win from the energy transition like nickel for batteries and copper for electrical wiring.
However, while Henry will soon be unconcerned about the volatile risks and rewards of oil and gas, his shareholders are not as fortunate. They will now have the exposure in the undiluted form of a Woodside share, with no cover from iron ore riches if something goes wrong.
BHP shareholders will face a difficult financial, and for some moral, decision on whether to stick with Woodside.
But first Woodside shareholders must approve the deal. Theoretically, the owners of the Perth-based LNG exporter have a choice, but practically, they do not.
Woodside as it stands is a gigantic bet on the $US12 billion ($16.1 billion) Scarborough gas project in an industry known for cost overruns and with diminishing availability of debt and equity finance. BHP’s projects will provide the cash to develop the Scarborough gas field and double the size of the Pluto LNG plant that will cool the gas to a liquid for export.
There is also a poison pill, a corporate tactic normally deployed to thwart a takeover, but in this case used to ensure it would happen. If Woodside shareholders reject the deal their company must buy BHP’s 26.5 per cent stake in the Scarborough field for $US1 billion, adding another $US1.5 billion to Woodside’s share of the project’s costs that it will have to meet without the free cash flow from BHP’s assets.
So the deal is likely to be approved and BHP shareholders will receive one Woodside share for every 5.5 BHP shares on June 1.
It is then the turn of Woodside’s new shareholders to decide: do they want oil and gas shares as much as they liked their more diverse and less carbon-intensive BHP investment?
The bulk buy of BHP’s petroleum division included an investment near impossible to exit otherwise: half of ExxonMobil’s sprawling and ageing Bass Strait operation off the Gippsland coast. In 2021 the offshore regulator NOPSEMA ordered 10 platforms to be removed and 180 wells made safe by 2027, and that is just the start of the cleanup.
Woodside’s costs for decommissioning its Australian assets assume NOPSEMA will allow it to leave mainly pipelines and much other equipment on the seabed forever.
And then there is the minor matter of climate change and the increasingly urgent energy transition.
Woodside’s own explanatory memorandum on the merger outlines a future for oil and gas companies that could feature litigation for greenwashing with misleading climate disclosures, shareholder activism, government incentives for competing energy technologies, difficulty in attracting skilled workers and direct limits on carbon emissions.
The last risk - limits on emissions - was not included in KPMG’s independent report on the deal, with no allowance for changes in current regulations that do next to nothing to limit industrial emissions.
However, the WA Environmental Protection Authority is currently reviewing its greenhouse gas conditions for Woodside’s biggest sources of carbon pollution: its own North West Shelf and Pluto LNG plants and the Chevron’s Wheatstone LNG plan that Woodside has equity in.
For the past two years, every major emitter assessed by WA’s EPA has received a requirement to reduce its direct emissions to zero by 2050 in roughly a straight line from now.
And finally, the biggest question mark of all - the future demand for oil and gas? There are detailed scenarios that support the views of both bulls and bears. However, do not confuse current Ukraine-fuelled high prices with the long term. From both economic and strategic viewpoints, investment in renewable energy is looking better every day.
In a changing world, especially on climate matters, much of the business case for Woodside - decommissioning, emissions and demand - depends on the status quo.
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