Woodside goes it alone on Scarborough LNG

Luring investment into greenfield gas projects is tough, even in a gas-starved world

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Not even a global gas shortage can convince investors to put their faith in newbuild liquefied natural gas projects, it seems. Australia’s Woodside Energy made big, risky concessions with private equity financiers to get its flagship Scarborough LNG project off the drawing board. Scarborough is a drop in the global LNG ocean, but the trouble faced by Woodside to get this far speaks volumes about the challenges of building greenfield plants today.

Woodside took a positive final investment decision (FID) on Monday at the Scarborough gas project offshore Western Australia and an expansion of the existing onshore Pluto facility. Gas from Scarborough will produce 8 million tonnes per annum (mtpa) of LNG from the expanded Pluto plant for export to Asian markets, with some gas sold to local WA domestic and industrial consumers. Scarborough and Pluto combined represent a $12 billion bet that Asian demand for gas will grow steadily out to 2050.

If Woodside is right, the investment will yield an internal rate of return (IRR) of more than 13.5% with an all-in cost of LNG supply to north Asia of ~$5.80/MMBtu. Right now, Asian spot LNG futures are changing hands for $36/MMBtu and a 13% Brent slope gives an oil-indexed LNG price of $10.64/MMBtu. But global gas markets are fickle. Those figures can and will change over the 20+year lifecycle of Scarborough and Pluto T2.

The spectacular margins being enjoyed by LNG exporters and traders today could be a distant memory by the time the first cargo of Scarborough LNG sets sail from Pluto’s second train in 2026. Global LNG liquefaction capacity is expected to grow by 70% by 2025. Major expansions are planned in North America, Qatar and Russia totalling >240 mtpa – 30 times greater than Scarborough.

All of these exporters are targeting the same market: China. As regular Energy Flux readers will recall, China is busy buying up US LNG to secure long-term supplies (Cheniere signed a fresh 20-year deal with a Chinese city gas company this week). China is underwriting America’s next LNG capacity boom. Will it also need Australian LNG?

Woodside seems to have missed the not-so-slow boat to China. A preliminary ‘heads of agreement’ signed in 2019 with Chinese independent energy player ENN for 1 mtpa of LNG from Scarborough appears to have fallen by the wayside amid the diplomatic spat between Canberra and Beijing.

Woodside CEO Meg O’Neill did not mention ENN in an analyst call this week. She said Scarborough is underpinned by three LNG sales and purchase agreements with Uniper, Pertamina and RWE for an aggregate 3.94 mtpa – less than half of the project’s 8 mtpa nameplate capacity.

There are two ways to look at this. If you believe global gas demand will outstrip supply in the 2030s and beyond, Scarborough’s spare capacity could be sold into spot markets at a premium to the rates achievable in long-term contracts.

If you see decarbonisation policies squeezing gas consumption and prices, revenue from those uncontracted volumes could come in well below the ~$5.80/MMBtu cost of supply for extended periods. In a structurally volatile market, that double-digit IRR cannot be guaranteed.

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