Woodside to delay Scarborough, Browse
Woodside Petroleum has been forced to delay two of its big West Australian gas projects, as it seeks to cut costs to reflect lower energy prices.
Woodside Petroleum has been forced to delay two of its big West Australian gas projects, Scarborough and Browse, as it seeks to cut costs to reflect lower energy prices and would consider buying multiple stakes in Australia’s largest LNG plant, the North West Shelf, should venture partners join Chevron in cashing out.
The WA producer, which revealed a $6.3bn hit from writedowns and charges on Tuesday, said it was taking a tougher approach to its $US11.4bn ($16.3bn) Scarborough to Pluto development with a final investment decision now due in the second half of 2021 from an earlier 2021 target. A decision on the go ahead for the long delayed $US20.5bn Browse project will now be made in 2023.
“Now we like everyone else are adjusting to the new world and the lower price deck that we put out there to understand how we optimise costs and optimise schedule to claw back as much of that robustness as possible in a lower oil price environment,” Woodside chief financial officer Sherry Duhe told investors.
“That’s the work that’s ongoing between now and 2021 when we get closer to a final investment decision [on Scarborough] to determine how much more competitive we can make that project so that it’s still resilient as it can be in the current price environment.”
Woodside now expects Brent oil to average just $US35 a barrel in the second half of 2020 after prices crashed earlier this year due to the Covid pandemic slashing demand and a supply war among major producers. Crude was trading at $US43 a barrel on Wednesday, double lows hit in April, but still at marginal levels for many big producers.
Woodside’s Burrup Hub concept – involving Scarborough gas being piped to an expanded Pluto plant and gas from Browse being processed through the existing NW Shelf plant which it operates – was questioned by Citi which noted investor scepticism that ‘Hub’ projects can exceed the company’s 12 per cent hurdle rate for new investments.
The broker argues Woodside should instead process Scarborough through NW Shelf rather than expanding Pluto, easing balance sheet pressure and boosting Scarborough‘s break-even LNG price given lower NWS tolls.
However, Woodside chief executive Peter Coleman noted longstanding issues to get a separate gas processing deal for Browse through the North West Shelf and said it was not an immediately easy fix to suggest the same solution for Scarborough.
“The commercial aspects of dealing with the NW Shelf means it’s very difficult for me as a CEO to sit here and say that we have a pathway for completing any deal under its current equity ownership structure as evidenced by the difficulty we’ve had in completing the Browse gas processing agreement,” Mr Coleman said. “Under any circumstance where you say well simply switch it across and run different gas to NW Shelf, remember we haven’t even agreed the other resource owner agreement which is something that should be a very simple agreement which is extraordinarily difficult.”
Woodside has yet to open talks with Chevron which is selling its one-sixth interest in the NW Shelf plant but Mr Coleman said he is open to considering both the US major’s stake and any other opportunities amid expectations other owners may also cash out of the facility in the next few years.
“It’s all going to come down to price and our ability to participate and what structure we go after and whether that would be by ourselves or with a partner or with back to back deals,” Mr Coleman said. “All of that is under review to be quite honest and we haven’t made a decision one way or the other.”
Woodside took an impairment on its own one-sixth interest in NW Shelf of $US450m, leaving it with a $US1.9bn value, which Credit Suisse said could fuel its M&A ambitions.
“The writedowns could catalyse writedowns by other JV partners, facilitating JV partner stake sales at lower value, with Woodside as a lead candidate to acquire them at discounts in our view,” Credit Suisse analyst Saul Kavonic said. “NW Shelf book value is now $US1.9bn, in line with our expectation any sale by Chevron could be a $US2bn price tag.”
Woodside reported its second quarter production on Wednesday with the price of LNG produced by facilities including Pluto and the North West Shelf falling to $US5 per million BTU, from $US8.10 per million BTU in the first quarter as it sold more supplies on the weaker spot market.
Woodside shares fell 2.15 per cent to $20.96.