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Woodside goes all-in on LNG with brave Tellurian buy: Russell

Australia's. Woodside Energy wishes to turn into one of the world's largest. independent producers of liquefied natural gas (LNG).

In itself this is not a bad ambition. However choosing to do so. by taking control of a distressed U.S. LNG task is certainly a brave. method of setting about it.

Woodside stated on Monday it has actually consented to obtain. all of Tellurian for an overall value of $1.2 billion,. consisting of a cash payment of some $900 million, or $1 per share,. a premium of 75% to the U.S. company's last closing rate.

The purchase price is largely unimportant. What is necessary. is whether Woodside can take Tellurian's Driftwood LNG project. in Louisiana from its early phases of development to its full. potential of producing 27 million metric heaps a year of the. super-chilled fuel.

Woodside President Meg O'Neill informed an investor. instruction on Monday the transaction positions Woodside to be a. international LNG powerhouse.

That is true, because if Woodside does effectively develop. the Driftwood project it possibly will become the. second-biggest independent LNG producer worldwide, overtaking. extremely majors such as Shell and Exxon Mobil.

Woodside's present LNG capacity - run, equity share and. off-take - stands at about 12.05 million heaps per annum.

While Driftwood is permitted for 27.6 million heaps a year,. Woodside's initial goal will be to quickly advance Stages 1 and. 2, which are awaiting Final Investment Decisions (FIDs) and have. a combined yearly capacity of about 16.5 million lots.

There are numerous compelling factors for Woodside to take on. the Driftwood project. Becoming world-scale is just one of them.

Having a strong existence in the Atlantic basin would enable. Woodside to take advantage of arbitrage opportunities in between. customers in Europe and in Asia, the two most significant demand centres. for LNG.

Woodside likewise 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 knowledge to establish. Driftwood, something that Tellurian perhaps lacked.

VARIOUS DESIGN

Woodside also brings a strong balance sheet and plans a. rather various design of selling LNG from the conventional. U.S. operation.

U.S. LNG plants tend to be tolling operations, where their. income is mostly originated from a repaired rate for converting. natural gas into LNG, which is then marketed by off-takers.

This frequently implies long-lasting off-take deals are required. before projects can get adequate moneying to be established.

This was largely the problem Tellurian faced beforehand. Driftwood, with preliminary deals with buyers such as Shell,. TotalEnergies, Vitol and others failing to. be transformed into firm contracts.

Woodside aims to enhance the worth of the Driftwood task by. accessing low-cost feedstock from the U.S. gas market,. putting the LNG into its own marketing portfolio, while still. keeping the choice for some tolling volumes.

Woodside likewise intends to bring in what it called high-quality. partners, and will target to offer down its equity stake to. around 50%.

To do this, Woodside is going to have to show it can establish. Driftwood in a prompt and affordable way.

The Perth-based company stated it anticipates advancement expenses. for Driftwood to be around $900-$ 915 a ton, which would be. around $14.9 billion for the initial capability of 16.5 million. lots a year.

Area LNG costs for shipment to North Asia << LNG-AS > ended at. $ 12.20 per million British thermal systems (mmBtu) in the week to. July 19, which is equivalent to about $631 a heap.

This would indicate a relatively fast recoupment of advancement. costs, even accounting for purchasing feedstock and operating. costs.

In addition to the threats associated with handling a task. that at best can be described as having a struggling history,. Woodside is also making a huge bet on the future of LNG as. the world shifts away from nonrenewable fuel sources.

Woodside's view has actually regularly been that LNG is required for. the shift provided it is less polluting than coal and. functions well as a peaking fuel to backup variable sustainable. generation from sources such as wind and solar.

Much will depend upon what paths are taken by federal governments,. with the threat that European countries go harder on storage. options such as batteries instead of gas-peaking plants.

LNG can likely remain a force in Asia's energy mix, but this. will mostly depend on the fuel being cost-competitive. versus coal while not undermining the success of LNG. manufacturers.

Disclosure: At the time of publication Clyde Russell owned. Woodside shares as an investor in a fund.

The viewpoints expressed here are those of the author, a. columnist .

(source: Reuters)