Chinese drop $16bn gas deal amid trade tensions
Woodside Petroleum said potential Chinese buyers have pulled out of a deal to acquire a stake in its $16bn Scarborough gas project.
Woodside Petroleum said potential Chinese buyers pulled out of a deal to acquire a stake in the energy producer’s $16bn Scarborough gas project amid the ratcheting up of trade tensions between the two countries.
The West Australian gas giant has been forced to shelve a process to sell a 25 per cent stake in Scarborough, partly due to talks falling apart with prospective Chinese investors lined up as buyers in the development.
“Potential Chinese purchasers have conveyed they cannot participate in an asset sales process at this time,” a Woodside spokeswoman told The Australian. “That was one of the reasons for electing not to sell down the stake at this stage.”
The move to step back from an equity investment in one of Australia’s biggest export earners casts a new shadow over the deteriorating relationship with the nation’s biggest trade partner.
Senior Morrison government officials last week advised China-exposed businesses in Australia to “find other markets” during a crisis phone hook-up ahead of a threatened ban on exports worth $6bn a year.
While the focus has been on cutbacks in critical commodities such as coal, the Woodside statement suggests China is also pulling back from broader investments in Australia’s resources at a time when the nation seeks to fight its way out of a Covid-linked economic rout.
The move by Chinese energy companies, likely to be state-owned companies, will spark fresh concern among the Morrison government as it seeks to ensure the trade relationship remains stable amid widespread economic volatility.
New customs figures from Beijing show Australia has exported more than $131bn to China, the second highest amount on record and China is also a significant investor in Australia’s resources sector.
The move to shelve the Scarborough sale has hiked pressure on Woodside’s balance sheet and could eventually force it into an equity raising, according to analysts.
Woodside has switched focus to selling a 50 per cent share of an expanded Pluto LNG plant which it controls outright.
Woodside said it had fielded strong interest from infrastructure investors in the facility known as Pluto 2, which will be supplied with gas from the Scarborough field.
“That’s where the best place is for co-investors to come into the project. Our view of course is that Woodside investors want to be exposed to the commodity risk. That’s what our cost of capital is based on and so at this point we’ve said we want to keep as much of the upstream as we possibly can,” chief executive Peter Coleman said, referring to Scarborough.
Still, that decision not to trim its Scarborough ownership has funding implications, with Woodside facing a $US1.5bn ($2.05bn) equity cheque to fund its expansion of the Pluto LNG plant, according to Citi.
“We think this further pressures the balance sheet,” Citi analyst James Byrne said. “Our equity raise expectation was $US1.1bn at a 50 per cent working interest, but the increased Scarborough capex at 75 per cent is a considerable $US1.5bn. We also think the lack of buyers for the project is a concern; why should shareholders support the project when Woodside’s peers in industry are not willing to do so?”
Woodside hosed down speculation it would raise equity, but acknowledged that may partly depend on market conditions.
‘We’ve tried to head that off today,” Mr Coleman told The Australian.
“We’re pretty clear, based on the assumptions we have, that we can see a pathway to fund these projects off our existing balance sheet capacity. But there’s a lot of water to go under the bridge. We need prices to continue to firm, we need to be successful in our equity selldown process as we go through and if we can do those things we’re confident we can maintain our credit rating and fund this through our existing debt capacity.”
The West Australian producer plans to process gas from its remote Scarborough field to prop up an expansion of its Pluto LNG project with gas from the long-delayed Browse field to fill the NW Shelf plant.
This year’s oil price crash forced Woodside to delay both Scarborough and Browse, with some analysts making the case for Scarborough gas to help fill NW Shelf given the looming available capacity.
However, Woodside said on Wednesday that Pluto Train 2 would be 30 per cent cheaper than the NW Shelf and had a shorter development time.
“NW Shelf is not designed for large volumes of Scarborough gas, a new train is more cost-efficient than modifications to NW Shelf and it extends the economic life of Pluto LNG at minimal cost,” Woodside said in its investor presentation.
“Scarborough to NW Shelf commercial negotiations would delay FID and delays would risk current contracts, heads of agreements and sales and purchase agreements.”
Woodside also makes the point it owns 90 per cent of Pluto Train 1 and will keep 50 per cent of Train 2 compared with just a one-sixth holding in NW Shelf.
A final investment decision is due on Scarborough in the second half of 2021 whereas Browse is “from 2023” onwards.
Woodside shares rose 6.3 per cent to $20.90 on Wednesday after another jump in oil prices.
