Column: Woodside goes all-in on LNG with brave Tellurian buy: Russell
22/07/2024 13:00
(Repeats item published earlier on Monday. The opinions
expressed here are those of the author, a columnist for
Reuters.)
By Clyde Russell
LAUNCESTON, Australia, July 22 (Reuters) - Australia's
Woodside Energy wants to become one of the world's largest
independent producers of liquefied natural gas (LNG).
In itself this is not a bad ambition. But choosing to do so
by taking over a troubled U.S. LNG project is certainly a brave
way of going about it.
Woodside WDS.AX said on Monday it has agreed to acquire all of
Tellurian TELL.A for a total value of $1.2 billion, including
a cash payment of some $900 million, or $1 per share, a premium
of 75% to the U.S. company's last closing price.
The purchase price is largely irrelevant. What's important
is whether Woodside can take Tellurian's Driftwood LNG project
in Louisiana from its early stages of development to its full
potential of producing 27 million metric tons a year of the
super-chilled fuel.
Woodside Chief Executive Meg O'Neill told an investor
briefing on Monday the transaction positions Woodside to be a
"global LNG powerhouse".
That is true, because if Woodside does successfully develop
the Driftwood project it potentially will become the
second-biggest independent LNG producer in the world, overtaking
super majors such as Shell SHEL.L and Exxon Mobil XOM.N .
Woodside's current LNG capacity - operated, equity share and
off-take - stands at about 12.05 million tons per annum.
While Driftwood is permitted for 27.6 million tons a year,
Woodside's initial aim will be to quickly advance Phases 1 and
2, which are awaiting Final Investment Decisions (FIDs) and have
a combined annual capacity of about 16.5 million tons.
There are several compelling reasons for Woodside to take on
the Driftwood project. Becoming world-scale is just one of
them.
Having a strong presence in the Atlantic basin would allow
Woodside to take advantage of arbitrage opportunities between
customers in Europe and in Asia, the two biggest demand centres
for LNG.
Woodside also has a strong track record of developing LNG
projects, including the North West Shelf and Pluto plants in
Western Australia state.
The company no doubt has the technical expertise to develop
Driftwood, something that Tellurian possibly lacked.
DIFFERENT MODEL
Woodside also brings a strong balance sheet and plans a
somewhat different model of selling LNG from the traditional
U.S. operation.
U.S. LNG plants tend to be tolling operations, where their
revenue is largely derived from a fixed price for converting
natural gas into LNG, which is then marketed by off-takers.
This often means long-term off-take deals are required
before projects can get sufficient funding to be developed.
This was largely the problem Tellurian faced in advancing
Driftwood, with preliminary deals with buyers such as Shell,
TotalEnergies TTEF.PA , Vitol VITOLV.UL and others failing to
be converted into firm agreements.
Woodside aims to boost the value of the Driftwood project by
accessing cheap feedstock from the U.S. natural gas market,
putting the LNG into its own marketing portfolio, while still
retaining the option for some tolling volumes.
Woodside also aims to bring in what it termed "high-quality
partners", and will target to sell down its equity stake to
around 50%.
To do this, Woodside is going to have to show it can develop
Driftwood in a timely and cost-effective manner.
The Perth-based company said it expects development costs
for Driftwood to be around $900-$915 a ton, which would be
around $14.9 billion for the initial capacity of 16.5 million
tons a year.
Spot LNG prices for delivery to North Asia LNG-AS ended at
$12.20 per million British thermal units (mmBtu) in the week to
July 19, which is equivalent to about $631 a ton.
This would imply a fairly rapid recoupment of development
costs, even accounting for buying feedstock and operating
expenses.
In addition to the risks involved in taking on a project
that at best can be described as having a troubled history,
Woodside is also making a massive bet on the future of LNG as
the world transitions away from fossil fuels.
Woodside's view has consistently been that LNG is needed for
the transition given it is less polluting than coal and
functions well as a peaking fuel to backup variable renewable
generation from sources such as wind and solar.
Much will depend on what paths are taken by governments,
with the risk that European countries go harder on storage
solutions such as batteries rather than gas-peaking plants.
LNG can likely remain a force in Asia's energy mix, but this
will largely be dependent on the fuel being cost-competitive
against coal while not undermining the profitability of LNG
producers.
Disclosure: At the time of publication Clyde Russell owned
Woodside shares as an investor in a fund.
The opinions expressed here are those of the author, a
columnist for Reuters.
(Editing by Tom Hogue)
((clyde.russell@thomsonreuters.com)(+61 437 622 448)(Reuters
Messaging: clyde.russell.thomsonreuters.com@reuters.net))