Woodside and BHP approve US$12bn Scarborough gas project and mega merger

Set amid a climate of growing hostility towards fossil fuel developments, Woodside Petroleum (ASX:WPL) and BHP (ASX:BHP) have signed off on one of Australia’s biggest resources projects in a decade, approving the US$12 billion Scarborough LNG project yesterday.

The announcement came as BHP and Woodside formalised their plans to merge BHP’s petroleum business with Woodside to create a $40 billion Australian oil and gas behemoth.

A decision was imminent after Woodside last week announced the sale of a 49% stake to Global Infrastructure Partners in the US$5.6 billion Pluto Train 2 development, which will take place alongside the delivery of Scarborough around 375km off WA’s northwest coast.

Construction is set to begin next year with first LNG cargoes to sail for Asia in 2026. Gas equivalent to 15% of the seaborne cargo must be supplied to WA’s domestic market.

As the project has progressed to an investment decision it has garnered increasing criticism and opposition from activist groups.

The Conservation Council of WA last week engaged the Environmental Defender’s Office to send a formal legal letter to Woodside boss Meg O’Neill, claiming it has not beeen assessed under the Commonwealth EBPC Act and that greenhouse gas emissions from Scarborough could pose a risk to the Great Barrier Reef on the other side of the country.

Woodside maintains the project has its primary approvals from State and Federal Government, and that it will be among the lowest emitting LNG projects in the world because the Scarborough Reservoir contains a CO2 content of only ~0.1%.

That compares favourably to its existing North West Shelf and Pluto fields at 2.4% and 2% respectively.

The development was trumpeted by State Premier Mark McGowan and Deputy Premier Roger Cook, who said it would create 3200 jobs in Western Australia.

“The Scarborough to Pluto Train 2 development stands to deliver decades of benefits for Western Australia, through jobs, economic stimulus and domestic gas,” Cook, the Minister for State Development, Jobs and Trade, said.

“LNG can be used globally as a transition fuel to displace more carbon intensive fuels such as coal and there is strong demand in international markets that have made commitments to net zero emissions.

“Natural gas is not only one of Western Australia’s most profitable exports, it is an important energy source for local industries that will help diversify the State’s economy and create more jobs.”

Scarborough “delivers value’: O’Neill

New Woodside boss Meg O’Neill said the Scarborough project, a 1km deep field containing an estimated 11.1 trillion cubic feet of dry gas that has sat idle since its discovery by BHP and ExxonMobil in 1979, will deliver value for shareholders.

Woodside also claims its development, alongside the merger with BHP’s oil and gas division, is coherent with its net zero by 2050 target.

The theory goes Scarborough will be shielded from and assist in the transition from fossil fuel consumption in Asia over the coming decades due to its lower CO2 content and sector low emissions intensity.

Chevron’s controversial Gorgon gas project, for instance, which has been lambasted for the perpetual impotence of its carbon capture and storage system, has a CO2 content as high as 14%.

Woodside says Scarborough and Pluto Train 2 will have an internal rate of return above 13.5%, all in supply cost to North Asia of $5.8/MMBtu, and a payback period of six years.

“Today’s decisions set Woodside on a transformative path. Scarborough will be a significant contributor to Woodside’s cash flows, the funding of future developments and new energy products, and shareholder returns,” she said.

“This capital efficient development leverages Woodside’s existing infrastructure and our proven expertise in project execution.

“The contracting model, development concept and execution strategy have been designed to reduce cost risk and protect shareholder value.

“The Scarborough reservoir contains only around 0.1% carbon dioxide, and Scarborough gas processed through the efficient and expanded Pluto LNG facility supports the decarbonisation goals of our customers in Asia.

“The final investment decision is underpinned by quality customer support with approximately 60% of Scarborough capacity contracted, including domestic gas for the proposed Perdaman urea project.

“Developing Scarborough delivers value for Woodside shareholders and significant long-term benefits locally and nationally, including thousands of jobs, taxation revenue and the supply of gas to export and domestic markets for decades to come.”

BHP boss Mike Henry also trumpeted Scarborough’s “low carbon” status.

“Scarborough will be amongst the lowest carbon incremental sources of LNG to world markets,” he said.

“Scarborough will provide a reliable source of LNG for global customers and secure gas supply for the domestic market, as well as ongoing employment in Western Australia.

“Scarborough will provide important cash flows and value for shareholders of the enlarged Woodside.”

BHP Petroleum-Woodside merger binding

Alongside the Scarborough FID, the merger of BHP’s petroleum division and Woodside is now binding after a formal share-sale was announced today.

BHP has received ‘greenwashing’ accusations from green activists and ESG-focused investors for handballing its oil, gas and coal assets to companies motivated to invest in fossil fuels rather than managing down the operations itself.

On the face of it the trimmed down big miner will come out of the Woodside deal, set to close in June next year, with a cleaner look and a focus on iron ore, steelmaking coal, battery metals and potash.

Henry said yesterday the enlarged Woodside would be better able to manage and create value for shareholders through the energy transition.

Woodside says the combined entity will deliver around US$400 million in synergies and still maintain the company’s 2050 climate targets.

“The combination will deliver the increased scale, diversity and resilience to better navigate the energy transition,” O’Neill said.

“We will have the balance sheet, cash flow and financial strength to help fund planned developments in the near-term, invest in future energy opportunities and return value to our shareholders through the cycle.

“Our emissions reduction targets will apply to the combined portfolio, supporting our aspiration to be net-zero by 2050 and our strategy to supply lower-carbon energy to our customers across the globe.”

Woodside & BHP share prices today:

Scarborough could be timed (im)perfectly for the next bear market: WoodMac

Analysts have started to digest the decision, which comes at a delicate time for both Woodside and the LNG market.

Woodside is facing questions about what the call to invest in Scarborough and expand Pluto means for the more mature North West Shelf joint venture, where Browse remains undeveloped and reserves are due to run low by the end of the decade.

WoodMac senior analyst Daniel Toleman said Scarborough was the largest upstream investment in Australia in a decade and first mega-project since Inpex sanctioned Ichthys several years ago.

It is also the last mega resource outside of Browse to be developed, leaving the status of the NWS JV in no man’s land.

“With Scarborough confirmed to Pluto, the forward plan for the NWS now needs urgent clarification,” Toleman said.

“The once-mighty NWS is maturing and needs new resource to keep its five trains full. Third-party agreements have been struck with Waitsia and Pluto. But these only provide a stopgap as we see spare capacity increasing to more than 8 mmtpa by 2030.

“A sizeable backfill development is needed to change this course.”

While record high spot prices are forecast to remain for a few years to come and should help Woodside fund Scarborough into production, the spectre of rising supply from the Middle East, and especially Qatar, could materialise as Pluto 2’s LNG cargos begin to leave port in 2026, Toleman says.

“Woodside is not the only LNG player looking to take advantage of rising prices and strong demand,” he said.

“Over the next 12 months we expect several low-cost projects to move towards sanction.

“These include Cheniere’s Corpus Christi Stage 3 and Venture Global’s Plaquemines project in the US, North Field South in Qatar and Arctic LNG-1 in Russia.

Toleman still views Scarborough as a company-making project for the combined Woodside-BHP business.

“It will bring over 20 years of strong cashflow, and locks in production growth through to 2030 and beyond,” he said.

“The next question is around participation. Having recently brought a partner into Pluto Train 2, does it intend to do the same with Scarborough?”