COLUMN | Mirror on the wall, which is the biggest deal of them all? Woodside/BHP for me! [Offshore Accounts]

People often ask me what is the most significant recent development in offshore.

Singapore’s two biggest yards, SembMarine and Keppel O&M, announcing merger talks (here) would be high on the list of tectonic changes transforming the sector in East Asia.

Rwanda and Mozambique striking a deal to try to contain the Islamist insurgency in Mozambique’s Cabo Delgado province would be the big story in Africa. Bloody Al Shabab attacks led to TotalEnergies declaring force majeure on the massive Mozambique LNG project at Afungi in April (here). On August 9, the Rwandan military announced it had taken the strategically important northern Mozambican port of Mocimboa da Praia from al-Shabab militants, according to DW (here). Maybe the US$20 billion project can move ahead if peace is restored.

In the rig business, six major players have gone bust (here), and consolidation is apace. The latest development is that Noble is selling four jackup rigs in Saudi Arabia to ADES for US$292 million (here), just as the Kingdom’s Public Investment Fund takes ADES private and delists it from the London stock exchange. This continues a significant trend of state-controlled entities increasingly dominating offshore services in the Gulf region (here).

In subsea mining, the tiny Pacific nation of Nauru, at the behest of The Minerals Company (here), has notified the International Seabed Authority that the UN body has two years to agree on the rules governing the subsea mining industry, or The Minerals Company will start work anyway, following whatever rules are in place then. If you wanted an example of corporate capture of a small state, it would be hard to best this example – Reuters coverage here.

The biggest deal is not the most beautiful

But Woodside announcing it is in discussions to buy all of BHP’s oil and gas assets is the one deal that will transform the Australian offshore scene, and tells us much about the troubles afflicting the sector there and these two companies.

BHP’s oil and gas unit is valued just shy of US$14 billion. Woodside itself has a market value of around US$14 billion, too, so it is offering to pay in shares, which BHP will distribute to its own shareholders directly. It is expected that the expanded Woodside after the deal will be owned 52 per cent by the existing Woodside shareholders, and 48 per cent by BHP shareholders.

If you think Nauru has problems managing its relationship with The Metals Company, just wait to see how beholden the state government of Western Australia is to this new national champion.

Woodside’s investor presentation on the deal is a “must read” here.

The background is a mess

The Australian offshore scene is a mess, suffering from a massive hangover after a gas-based boom that propelled the country to the top of the list of the world’s largest LNG exporters in 2020 (here). Along the way, Shell suffered serious teething problems with its US$17 billion Prelude floating FLNG project (here), and Chevron’s Gorgon project became a by-word for cost mismanagement.

The country’s last “mega-project,” the Gorgon LNG project in Western Australia, was budgeted to cost US$37 billion when approved in 2009, with the first LNG exports planned for 2014. The final cost came in 46 per cent over budget, at US$54 billion. Gorgon started exporting LNG in March 2016, but has been plagued with maintenance problems and defects at the plant, which have led to several shutdowns for emergency repairs.

Majors run for the door

Faced with high costs and low returns, major international oil and gas companies have headed for the exit from Australia.

BP and Equinor decided not to drill in the Great Australian Bight after protests from environmentalists. Hess sold its undeveloped Equus offshore gas field to local player Western Gas (here). Equus remains undeveloped. In 2018, ExxonMobil sold its stake in the undeveloped Scarborough gas field to Woodside, and tried to sell its interests in the Bass Strait/Gippsland Basin as well, a process that was aborted in 2020.

Aussie player Santos became operator of the Bayu-Undan joint venture in mid-2020 after completing its acquisition of ConocoPhillips’ northern Australian and Timor-Leste interests. In May 2020, ENI announced that it, too, wanted to sell its Australian interests, including the Blacktip gas field and a share in the Darwin LNG plant.

Woodside goes “ex growth”

Behind Woodside’s desire to combine with BHP’s oil and gas unit is a decade of failure. Efforts to develop new projects abroad have not been very successful, except in Senegal. Efforts to develop further fields in Australia have stalled, most notably Scarborough. Woodside’s first major international discovery, Chinguetti field in Mauritania, grossly underperformed and was sold to Petronas Carigali of Malaysia. It is now being plugged and abandoned by the rig Pacific Santa Ana.

Woodside’s exploration in Myanmar has been successful, but the military coup there this year and the subsequent repression mean it is highly unlikely that Woodside will be able to develop these assets in the short term (here).

Only the Sangomar oil field in Senegal offers international growth for Woodside, with first oil slated for 2023 from a Modec-managed FPSO. Now Woodside can add BHP’s Gulf of Mexico, and Trinidad and Tobago assets to its portfolio. Of special interest to Woodside is BHP’s acreage in the US Gulf of Mexico, where Woodside would gain control of interests in the Mad Dog, Shenzi and Atlantis fields, which hold up to 1.3 billion barrels of oil equivalent reserves.

The key slide in the investor presentation shows a sharp drop is forecast in production for both companies. By 2027, Woodside’s production will be 40 per cent lower than on 2024 unless it can get the US$11.5 billion Scarborough gas project into development.

Woodside needs Scarborough’s production badly, and its needs to buy BHP’s stake to get the project moving.

BoilingCold on this deal

Commentator Peter Milne of the BoilingCold blog reckons that Woodside is buying BHP’s oil and gas assets because BHP itself was reluctant to proceed with the Scarborough project. He points out that as a diversified miner, BHP has a lot more strategic choices than Woodside on where and how to invest its capital (here).

“The plunging production shows why Woodside is so desperate for Scarborough to go ahead,” Mr Milne wrote. “Without it, the merged company’s main activity would soon become decommissioning.

“But just because Scarborough looks good to a company with no other options does not mean it makes sense for investors with unlimited choices to place in their portfolio.

“Clearly, BHP was not a fan.”

The merged Woodside-BHP entity will hold equity interests of 100 per cent in Scarborough and 51 per cent of Pluto LNG Train 2.

Effectively, Woodside can then push through the Scarborough project without its pesky mining-focused partner objecting, just as it bought out ExxonMobil’s share when the American company indicated it had better, higher return projects itself – like in Guyana, where ExxonMobil’s continued exploration success is another huge story we need to update.

Worse, even as Woodside’s production is set to fall from 2024 onwards without Scarborough, it faces huge decommissioning liabilities.

The shambles of Northern Endeavour

After Woodside handed over the FPSO Northern Endeavour and the depleted Laminaria-Corallina oil fields to under-funded Northern Oil and Gas in 2015, Australian tax payers found themselves on the hook for hundreds of millions of dollars in decommissioning costs after Northern went spectacularly, and unsurprisingly, bust.

As we observed here in our coverage of the commissioning scandal, “Woodside did not even sell the Northern Endeavour and the Laminaria-Corallina oil fields to the newly-formed local minnow NOGA in 2015: it simply handed the assets over, along with AU$24 million (US$17.5 million) in cash, which Woodside claimed was sufficient to cover decommissioning.”

It wasn’t, and the only upside to the torrid saga of corporate lying, bureaucratic incompetence, and business bankruptcy with Northern Endeavour was a sudden and very painful awareness that the removal of all of Australia’s offshore oil and gas infrastructure will cost billions, and will need careful management and oversight.

Former Woodside CEO Peter Coleman behaved perfectly legally, but with total shamelessness. The Northern Endeavour case finally led the regulator to close the loophole he exploited.

Decommissioning risk is significant

Unfortunately, BHP’s Australia assets are also packed with unknown and unquantified decommissioning liabilities. BHP is the operator of the Pyrenees and Macedon offshore fields, and BHP has 50 per cent ownership in the Bass Strait joint venture with ExxonMobil, assets with a heritage stretching back to Australia’s first offshore well in 1965, which discovered the Barracouta gas field.

Analysts have already quizzed Woodside CEO Meg O’Neill on these Bass Strait liabilities that Woodside will assume, and received vague and unconvincing answers. Woodside’s debacle with Northern Endeavour suggests that the company barely knows the cost of its own decommissioning liabilities, let alone BHP’s.

Enfield and Woollybutt clean-ups will provide clarity

Old fields typically equal high-cost decommissioning. Woodside itself is on the hook to permanently plug and abandon the 18 wells in the Enfield oil field and to dispose of the turret of the Nganhurra FPSO, as well as its share of the North West Shelf Project. Production from Enfield ceased on November 7, 2018 and the FPSO sailed away four weeks later for lay-up in Labuan, leaving its disconnect-able mooring turret behind. Woodside has proposed that this be cleaned up and turned into an artificial reef.

ENI has also been forced to plug and abandon and decommission its Woollybutt Field by the Australian regulator, nine years since the offshore field ceased production and the FPSO Four Rainbow left location.

When the Enfield and Woollybutt decommissionings are finally accomplished, the Australian industry will have a much better indication of the costs involved. It’s not going to be pretty.

Woodside itself should be a take-over candidate

A badly run oil and gas company which can’t find much oil and gas and is living off its past glories should be a prime target for a takeover. In any rational world Shell would have taken out Woodside long ago.

Unfortunately, Woodside’s cosseted management have proved much better at lobbying for their own survival with Canberra than the interests of shareholders.

Not in the national interest

Shell wanted to buy Woodside in 2001, but this take-over was blocked by the Liberal government in Canberra on the grounds of Australian national interest. This effectively locked the door to Woodside as an acquisition candidate. In this era of decarbonisation, however, keeping Woodside as an Australian national champion seems quaint.

Rebuffed, Shell gradually sold down its interest, where it had held over a third of the company’s stock. In November 2010, Shell sold 10 percent of the issued capital of Woodside, taking its stake to just over 24 per cent. In 2014, Shell then sold down again to hold just over 13 per cent of Woodside, before exiting entirely in November 2017. When it completely sold in 2017, Shell received AU$31.10 (US$23.79 at the exchange rate on the day of the sale). On Friday, Woodside shares closed at AU$20.28 (US$14.83 at today’s exchange rate).

Getting out was a good deal for Shell.

Santos and Oil Search left no other choice

With Santos in the process of buying Oil Search in another all-Aussie, all-share deal, Woodside had no partners left in Australia. Santos had already gobbled up Quadrant Energy, the owner of Apache’s former assets in Australia, and ConocoPhillips’ assets. The combined Santos-Oil Search entity will have market capitalisation of about AU$20 billion (US$14.6 billion) – bigger than Woodside alone – and combined 2021 production of 116 million barrels of oil equivalent from a portfolio of assets in Australia, Papua New Guinea, Timor-Leste and Alaska.

Santos bought Oil Search to make itself too big to buy, and it presumably now falls under the “national interest” umbrella against a take-over, as well.

Like Woodside, Santos’ main focus for growth is now domestic as well. In June, Santos announced that it had started the front-end engineering and design (FEED) phase of its US$2 billion Dorado oil project offshore Western Australia, and it announced that Altera Infrastructure (former TeeKay Offshore Partners) would be doing the FEED for the FPSO.

Warning to Western Australia

Western Australia will be home to Australia’s undisputed national oil and gas champion if Woodside succeeds with its acquisition of BHP’s oil and gas assets.

According to Woodside, 67 per cent of the combined entity’s production will be in Western Australia, a state with less than three million people. Alone, many feel that Woodside exercised disproportionate influence over offshore policy making in Australia. When combined with BHP, Woodside will be even bigger and more influential.

The Santos-Oil Search and Woodside-BHP deals leave only two significant local players in Australia. They are officially now too big to fail, and officially too important to be bought by foreigners. This puts Western Australian premier Mark McGowan in a difficult position.

There will be some difficult trade-offs ahead as only two corporate giants are left standing in Perth’s oil and gas scene.

As with SembMarine and Keppel O&M in Singapore, so with Woodside and BHP’s oil and gas assets in Australia: tying together two rocks doesn’t make them float.

Background Reading

Our previous analyses of the current deal making frenzy are here and here.

Reuters coverage of TotalEnergies’ force majeure declaration in Mozambique is here.

Woodside’s information pack on Scarborough is here.

Reminder: Woodside’s investor presentation on the deal is a “must read” here.