Australia’s North West Shelf set for change
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Chevron’s announcement to offer its 16.7% stake in the North West Shelf (NWS) LNG project for sale has surprised some. Australia is absolutely core to Chevron. The country is the single largest contributor to company cash flow and contributes almost a third of remaining global upstream value. And disposing amid the current crisis inevitably impacts valuation.
But portfolio restructuring is critical to improving returns as all companies seek to focus around core, advantaged positions. Along with the other Majors, Chevron has already made significant divestments, primarily mature, non-core and low cash margin assets. I discussed with David Low, senior research analyst, Australasia upstream, about why NWS fits the bill as Chevron looks to reduce its exposure to Australia and how the sale might shake up the future of the project.
Why is Chevron moving now to dispose of this strategic asset?
We see three key drivers. Firstly, the NWS is increasingly non-core in an Australian portfolio dominated by the early-life Gorgon and Wheatstone LNG projects. Chevron operates both. A sale will free up capital to be reinvested into other opportunities globally and to reduce the value concentration risk in the portfolio.
Secondly, the NWS needs new supply to continue to operate at capacity. New volumes will be sourced independently from the existing joint venture, triggering a very different dynamic for the partners and a switch from high upstream value to infrastructure tolling. Chevron has likely concluded that, being unable to monetise its own gas through the facility, the shift to an infrastructure play outweighs the merits of remaining in the joint venture.
Finally, as an ageing facility, the NWS has significant future capital costs. While the project work scope has yet to be agreed, capex estimates for the Karratha Life Extension 2 (KLE-2) range up to as much as US$12 billion. Chevron’s management and shareholders may see this as an unattractive prospect in return for infrastructure-like returns.
Who is in the running to acquire Chevron’s stake?
Firstly, it’s important to remember that the NWS joint-venture partners have pre-emption rights. Woodside stands out as the most interested. The company is financially capable and has announced it is actively seeking M&A opportunities at home.
Of course, there could be interest from others. Japanese companies are already partners in the NWS as well as in many other Australian LNG projects and could find the sale of interest. National oil companies will be looking closely, including those from China, Russia and the Middle East. In the current political climate, a bid from China would be an interesting test of the Australian government’s increasingly defensive position on Chinese investment and may act as a deterrent.
Finally, a private equity-backed bid is also a possibility. Brookfield has seen recent success and Harbour Energy has shown interest in the past. A tie-up with an operator like Beach Energy for the NWS stake could materialise, with Beach showing a strong appetite to grow its Australian portfolio.
What could a Woodside deal mean for the project and for the company’s portfolio?
Should Woodside acquire Chevron’s stake, it could be transformational for both the company and the NWS. Firstly, for Woodside a deal could see the development of its Scarborough upstream project flowing into the NWS. This option could be a more economical alternative when compared to constructing a new Pluto expansion train. Though any facility modifications to accommodate for Scarborough gas and the increased budget for the KLE-2 project will need to be taken into consideration. Woodside’s ownership of upstream molecules that are most likely to supply the project in future will create greater value in owning additional equity.
Secondly, this option could also change the outlook for Woodside’s planned sell down of its positions in both Scarborough and the Pluto expansion train. Would Woodside still pursue a farm down of Scarborough? And if so, could a divestment provide a pathway for an NOC to enter not only Scarborough but also the NWS itself? Both are possible outcomes.
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Could this be the catalyst for further divestment from Australia by the Majors?
To some extent. Both Shell and BP could be encouraged to review their NWS positions. Increasingly vocal in their commitment to reducing CO2, the NWS infrastructure, among the world’s oldest and least efficient LNG projects, may be increasingly unattractive as both companies work towards carbon neutrality. Freeing up capital to deleverage would also be a motivation. And were a third party to acquire a stake in Scarborough from Woodside, that company might also be interested in either Shell’s or BP's NWS stake. A Chevron sale will set a price point for any further new entrants into the NWS and reduce risk for additional investors.
Looking more broadly, Eni stands out among the Majors with a mature Australian portfolio that accounts for only 1% of its global upstream value. Moves to divest its upstream positions and stake in Darwin LNG are now under way. Of far greater materiality is Total’s position in the GLNG and Ichthys LNG projects. With both projects underperforming on reserves and returns, their role in the portfolio may be questioned. Total has already sold down 4% of Ichthys and could be inclined to divest more for the right price.
But let’s not forget that Australia remains core to the Majors. And while investment may have peaked, early-life LNG projects provide tremendous high-margin cash flow for decades, and at scale. Change is now underway, but we can expect the Majors to be at the heart of Australian LNG supply for years to come.
APAC Energy Buzz is a blog by Wood Mackenzie Asia Pacific Vice Chair, Gavin Thompson. In his blog, Gavin shares the sights and sounds of what’s trending in the region and what’s weighing on business leaders’ minds.