Woodside sells 10pc stake in Scarborough gas project to Japanese duo

The $1.34bn deal will ease the capital expenditure burden on Woodside to develop the $16.5bn project in WA that is the subject of intense environmental opposition.

Woodside Energy has agreed to sell a 10 per cent stake in its $16.5bn Scarborough liquefied natural-gas project to a consortium of Japanese companies in a deal worth $US880m ($1.34bn) despite intense environmental opposition to the development.

The deal with Sumitomo and Sojitz for 10 per cent was valued at $US500m, but it will also see the Japanese duo repay Woodside for costs already incurred, bringing the total deal to $US880m.

It eases the capital expenditure burden on Woodside to develop the Scarborough facility while underscoring a smoothing of Japanese tensions with Australia triggered when the Albanese government moved to impose a price cap on new gas supplies on the east coast.

The deal will also see Woodside sell the two Japanese companies, collectively known as LNG Japan Corporation, a dozen LNG cargoes per year – worth approximately 0.9 million tonnes per annum – for a decade commencing in 2026.

The company’s proposed selldown of Scarborough has been a stop-start process over the last two years. Its $40bn merger with BHP Petroleum eased some financial pressure to strike a deal and a year ago Woodside said it was cautious on a long-held desire to sell half of its 100 per cent stake in Scarborough saying it would not engage in a fire sale of any holding.

Woodside chief executive Meg O’Neill said the deal illustrates the ongoing strength of demand from Asia.

“The support of LNG Japan is testament to the quality of the Scarborough project. It also underscores the ongoing demand from Japanese buyers for new supplies of gas and the role of gas in supporting Japan’s energy security,” said Ms O’Neill.

Japan is one of the largest foreign investors in Australia’s gas industry, but the intervention of the Albanese government late last year through its mandatory code of conduct – the centrepiece of which included a $12 cap on new gas – stoked alarm from Tokyo.

The head of Japan’s biggest oil and gas company earlier this year said Australia could stoke global instability should it continue with policies that amounted to “quiet quitting” of the LNG industry.

Tensions have since eased after the government moved to soften its centrepiece legislation, offering a plethora of exemptions that LNG industry say strikes the right balance.

Ms O‘Neill said the deal would see broad cooperation between the new partners.

“Our new energy agreements with Sumitomo and Sojitz provide further opportunities for us to work closely together on our shared decarbonisation and energy security ambitions. Scarborough will be an important source of gas for both the Western Australian and international markets, supporting domestic jobs and providing taxation revenue for the state and federal governments.”

The three companies have also agreed to collaborate on new projects including on ammonia, hydrogen, carbon capture and storage and carbon management technology.

Further equity stake sales in Scarborough are likely. Woodside will still own 90 per cent of Scarborough, and it has indicated it would likely reduce it down to nearer to 50 per cent.

Shares in Woodside rose nearly 1 per cent on Tuesday after the announcement and close dup 0.6 per cent to $38.40.

RBC Capital analyst Gordon Ramsay said the transaction will reduce Woodside’s exposure.

“We also like the fact this helps to de-risk Woodside’s exposure to its high level of equity in Scarborough by reducing future development expenditure and technical risk,” he said.

However, Citi said the price was 10 per cent below fair value.

“The 10 per cent discount to fair value may also be a function of Scarborough’s environmental plans yet to be approved and petroleum resource rent tax changes yet to pass through both houses of parliament,” Citi analyst James Byrne said.

The federal government in May introduced a 90 per cent cap on the use of deductions that can be offset under the PRRT from July 1, which will bring forward revenue from the nation’s offshore LNG projects.

The reforms effectively mean the 40 per cent PRRT tax rate will be applied to at least 10 per cent of upstream revenue from LNG projects as a minimum cash tax payment.

“The fact that a Japanese firm is buying equity in an Australian LNG project suggests risks around project execution, PRRT, safeguard mechanism, and offshore regulation may be better constrained. Indeed, we believe a Scarborough sell down would have occurred in late 2022 had the PRRT review not been undertaken,” Mr Byrne said.

Woodside said it is targeting completion of the equity stake by the first quarter of 2024, but it will require approval from the Foreign Investment Review Board and other regulatory authorities.

While the deal is unlikely to draw too much scepticism from Australian regulators, Woodside will need to accelerate development of Scarborough, which is one of the company’s key growth projects as it looks to capitalise on demand following Russia’s invasion of Ukraine.

In July, the company said work on Scarborough was 38 per cent, but the market is increasingly concerned about potential delays as Woodside awaits so-called secondary approvals from NOPSEMA.

Ms O’Neill said Woodside was engaging constructively with NOPSEMA but declined to provide a timetable for when licences were expected.