Woodside CEO Meg O’Neill defends $16.5bn WA Scarborough gas deal
Analysts raise concerns over the outlook for NW Shelf LNG exports and also question why Woodside Petroleum had not sold down equity in its Scarborough gas project.
Woodside Petroleum may shut off supplies in 2024 from Australia’s biggest LNG plant, Western Australia’s North West Shelf, as concerns grow about the lack of gas for the facility, while its decision to sanction Scarborough without an equity selldown has also been called into question by analysts.
The issue has been reignited following Woodside’s decision to send gas from the $16.5bn Scarborough field to prop up an expansion of its existing Pluto LNG plant, rather than filling a looming supply gas at its jointly owned NW Shelf facility which is located next door to Pluto.
One of the five NW Shelf LNG processing trains could be closed by 2024, Woodside conceded.
“2024 notionally is when we would likely be shutting in a first train,” Woodside chief executive Meg O’Neill told analysts on Tuesday.
The plan for NW Shelf, owned by six companies and operated by Woodside, needs urgent attention, according to consultancy firm Wood Mackenzie.
“With Scarborough confirmed to Pluto, the forward plan for the NWS now needs urgent clarification,” WoodMac analyst Daniel Toleman said.
“The once-mighty NWS is maturing and needs new resource to keep its five trains full. Third-party agreements have been struck with Waitsia and Pluto. But these only provide a stopgap as we see spare capacity increasing to more than 8m tonnes a year by 2030. A sizeable backfill development is needed to change this course.”
WoodMac first flagged its concern about filling NW Shelf over a year ago while some analysts thought the Scarborough-NWS option would deliver a better return for Woodside.
Woodside and BHP on Monday approved the $16.5bn Scarborough and Pluto-2 projects, Australia’s biggest gas development in a decade, in a move that immediately stoked protests by angry climate campaigners and came a year after it was forced to delay the facility due to rock bottom oil prices.
The giant offshore Browse field was originally envisaged as the source of gas to fill a supply gap at the NW Shelf, but there is little expectation Browse will now be developed this decade given cost issues, environmental concerns and misalignment among its joint venture owners.
Ms O’Neill pointed out that dry gas from Scarborough was ill-suited to be processed at the NW Shelf. While venture owners including Shell have suggested they wanted it to remain an option, the Woodside chief said it was risky to alter NW Shelf while it remains an operating plant, just in order to incorporate Scarborough gas.
“We looked many times at the possibility of taking Scarborough across to North West Shelf. The plant modifications required to do that at volume would be extensive. And for those of you who are concerned around capex risk, when you‘re doing that sort of complicated modifications on a live plant the capital risk is tremendous,” Ms O’Neill said.
Commercial hurdles with its five NW Shelf joint venture partners was also an issue.
“The other issue with North West Shelf is the commercial complexity of trying to negotiate a processing arrangement there. So when we look at it all, we feel very confident that taking the Scarborough gas across Pluto sites … is the best investment decision for our shareholders.”
Woodside also defended giving the go-ahead for Scarborough without selling down a stake, saying it plans to eventually offload up to 50 per cent of the equity in the upstream development over the long-term.
The West Australian producer has been looking for a partner to join the Scarborough offshore field for several years but decided to go ahead and sanction the development without striking a deal.
While BHP owns 25 per cent of Scarborough, the $40bn merger between the pair means Woodside would ultimately own 100 per cent of the field.
MST Marquee analyst Mark Samter told Ms O’Neill the situation was “highly unusual”.
But Ms O’Neill said she was comfortable with the risk and still expects to sell down a stake with Woodside ultimately owning a 50 per cent share of Scarborough.
“We do have the Scarborough sell down process underway. But as we’ve said before, we want to make sure that we do two things. We want a partner that will be a good partner for us for the long term. And we want to make sure that when we sell down Scarborough, it’s in a manner that is value creative for Woodside shareholders. So we will be patient.”
Woodside shares were up 3.3 per cent at $22.42 on the ASX on Tuesday afternoon, with BHP up 4.6 per cent at $38.26 as iron ore futures jumps 10 per cent on China stimulus hopes.