03/12/2021 - 09:00

Scarborough move a lock for Woodside

03/12/2021 - 09:00

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Success at the Scarborough project for Woodside Petroleum hinges on an environmental battle, selling equity, and further offtake deals.

Scarborough move a lock for Woodside
Mark McGowan and Meg O’Neill sign an agreement for Woodside’s domestic gas obligations. Photo: Woodside

Images of Scarborough Gas Action Alliance activists blockading a Burrup Peninsula road last week might spark flashbacks for long-term Woodside Petroleum shareholders.

They will be reminded of the James Price Point LNG project in the Kimberley, dropped in 2013 after environmental pressure and an unfavourable court ruling on approvals.

It may well be a case of back to the future.

Woodside made a final investment decision on a $16.5 billion development to pipe gas from the Scarborough field off the Pilbara coast to a new liquefaction train at Pluto on the Burrup last week.

Activists have already made it clear the Scarborough project will face a concerted lobbying effort, and its own court challenge.

“It’s not going to happen,” one protester said in a social media video, referring to the Scarborough project.

“We beat Woodside at James Price Point, we’ll beat them in the Pilbara.”

Political leaders might need to brace for a fight similar to Adani Group’s Carmichael coal mine in Queensland.

The climate impact of the Scarborough decision is not easily answered.

It is often reported that the Scarborough development, which will unlock a reservoir of 11 trillion cubic feet of gas to produce up to 8 million tonnes annually, is incompatible with modelling to achieve net zero carbon emissions by 2050.

Work released by the International Energy Agency suggested there was no need for new investment in fossil fuel supply in a transition pathway it modelled, although it stressed it was one potential pathway.

“The IEA has confirmed what climate science has been telling us for years, there is no room for new gas projects if we are to limit warming to 1.5° Celcius,” lobby group Market Forces asset management campaigner Will van de Pol said.

But the IEA’s report shows fossil fuels would still contribute about 20 per cent of global energy supply, even in a 2050 net zero scenario, including with carbon capture.

The ‘no new investment’ call was based on predictions of a decline in demand for fossil fuels and a principle that a smooth transition of oil prices was desirable.

Low-cost fossil fuel projects would simply push out more expensive operators, the report said, with an environmental impact only at the margins.

In the modelling, the share of global oil supply produced by the Organization of the Petroleum Exporting Countries rises from about 37 per cent to 52 per cent in 2050.

The upshot is that building Scarborough is not incompatible with the world achieving net zero by 2050, particularly if gas market demand falls anyway as countries switch to other fuel sources.

However, the modelling suggests there will not be many oil and gas operations still active by 2050, and the most expensive producers would exit.

The more immediate environmental problem for Woodside will be heard in the Supreme Court in December, where the Conservation Council of Western Australia is challenging the Environmental Protection Authority’s approvals.

Woodside already had the environmental green light for two LNG trains, so the EPA said the Scarborough plan did not need further assessment.

CCWA’s argument is that the move did not take into account the specific carbon composition of the Scarborough field.

Going big

There’s a level of confidence in Woodside’s strategy in the market if analyst reports are anything to go by.

Seven of 14 analysts tracked by Morningstar listed Woodside as a ‘buy’ or ‘strong buy’ recommendation in late November, while five rated Woodside a ‘hold’.

A November report by consultants Wood Mackenzie suggested there would be a growing gap between gas demand and supply in Asia.

Even under a scenario modelled to keep temperature rises to 2°C, Asian demand would be strong at 128 billion cubic feet a day, it said.

Wood Mackenzie also said LNG spot prices were at record highs and could continue to be high until Scarborough’s first gas in 2026.

With prices looking strong, Woodside has some big challenges to navigate, highlighted in the company’s analyst briefing on the Scarborough announcement.

Those include three potential risks: costs in a tight labour market, need to contract more gas, and reducing its equity stake.

Wood Mackenzie senior analyst Daniel Toleman said Woodside had focused on reducing the risk of cost overruns.

“Pluto Train 2 is a brownfield expansion with site works complete, while Scarborough’s contracting approach shifts much of the cost overrun risk to the contractors,” he said.

At the time Woodside announced the Scarborough decision, it also formalised a deal to merge with BHP’s oil and gas division, which will create a $40 billion-plus business.

The new entity will own 100 per cent of the Scarborough gas resource, with Woodside working to reduce its exposure by selling down equity.

The company went through the same process with Pluto Train 2, selling 49 per cent of the equity to GIP earlier in the month.

But 100 per cent ownership also means 100 per cent of the risk. Responding to questions from analysts about the high equity exposure, chief executive Meg O'Neill said the project was de-risked.

The Scarborough selldown process was well under way, she said, and the project work had been well advanced for the decision.

Woodside will need more buyers than the three it has signed, however.

About 60 per cent of its share of LNG has been contracted, not accounting for BHP’s 26.5 per cent share of the project it will soon control.

There will also be challenges once the plant gets into operation.

Woodside’s plan includes 2 million tonnes of Scarborough gas being processed through the existing Pluto Train 1, which will extend the lifespan of the existing Pluto gas fields.

When they are depleted, Scarborough gas through Train 1 will rise to 3mtpa, leaving a 2mtpa gap to fill.

“[Now] that we’ve got Scarborough behind us we’ll be out talking to other resources around backfill to Pluto Train 1,” Ms O'Neill told analysts.

Next door at the Karratha Gas Plant, the five operating LNG trains of the North West Shelf Venture will have growing excess capacity of their own.

That will be partly resolved by a swap deal to process gas with Mitsui & Co and Beach Energy, which are running the Waitsia project in the Perth Basin.

But the longer-term decision will be for the Browse fields, which will be piped more than 800 kilometres back to Karratha.

That project, previously intended to be developed through James Price Point, will be decided in 2023.

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