Woodside goes all-in on LNG with brave Tellurian buy: Russell
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).
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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 said on Monday it has agreed to acquire all of Tellurian 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 and Exxon Mobil.
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, Vitol 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 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)