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Woodside’s $16b Scarborough affair splits sentiment

Most fossil fuel companies are particularly sensitive to the blowback from environmental stakeholders. The Scarborough gas field and Pluto processing facility has been billed by Woodside as significantly less emissions-intensive and thus contributing to a lower carbon future.

Given the days when gas was given some grudging approval as a transition fuel to bridge the gap to renewables are gone, the best Woodside can offer is to produce cleaner gas than other producers.

Woodside CEO Meg O’Neal with WA Premier Mark McGowan at the APPEA conference in Perth, June 15, 2021.

Woodside CEO Meg O’Neal with WA Premier Mark McGowan at the APPEA conference in Perth, June 15, 2021. Credit:Trevor Collens

That said, Woodside is a fossil fuel energy company, and it’s a transformational moment for the company – one which its chief executive Meg O’Neill says is the biggest in its 67-year history.

The Scarborough field’s resource size is 11 trillion cubic feet, the long term cash flow is expected to be $US26 billion, and it will generate a 13.5 per cent per annum internal rate of return. Woodside’s share of the capital cost of the combined onshore and offshore facilities will be $US6.9 billion.

Woodside’s deal with BHP will ultimately give it 100 per cent of Scarborough, a new portfolio of cash producing oil and gas assets and solve its problems of declining production from its North West Shelf project. It has already contracted to sell 60 per cent of Scarborough’s production to fuel-thirsty local and offshore customers.

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However, that doesn’t make the project risk-free. While Woodside has found an investor, Global Infrastructure Partners (GIP), to partner it with onshore capital development costs, once the merger with BHP is complete it will be responsible for 100 per cent of the offshore Scarborough project costs.

History is littered with examples of cost overruns on these large oil and gas projects. And despite repeated assurances from O’Neil that Woodside had cost-proofed the development, some analysts were not buying it.

Meanwhile, there are also the perennial risks associated with the movement in the oil/LNG price even though Woodside’s financial case is predicated on an oil price of $US65 – well below the current $US79.70 level.

These deals have been announced during a purple patch for producers and as economies across the globe gear up for the post-COVID recovery. They are long life projects and no one can predict the timing of the move away from fossil fuels.

More than 50 per cent of today’s energy comes from oil and gas and this can’t simply be turned off.

But none of this seemed to preoccupy the market on Tuesday, which hailed the approval as a win for both BHP and Woodside investors. The miner’s shares jumped 4 per cent, while Woodside shares closed the session 3.5 per cent stronger.

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