Shares in Woodside Petroleum rose more than 2% yesterday, not only because the company revealed a $5 billion plan to give it a green tinge over the next decade, but because oil prices continued to recover from last week’s sell-off.
Woodside shares closed at $22.40, up 2.1% on a day when the wider market kicked sharply higher after two days of big gains on Wall Street that also saw US oil pries regain the $US71 a barrel level after being as low as less than $US66 a barrel late last week.
It was somehow appropriate that Woodside’s share price reacted to what happened in its core business – oil and especially LNG production which will be bolstered by the $18 billion merger with BHP’s oil and gas business and not the new green projects.
The company is still a fossil fuel business in the eyes of many, especially younger people. But for millions of people in countries like China. Japan and South Korea, Woodside’s gas is also essential for survival until renewables find their way into the everyday energy supply.
Woodside CEO Meg O’Neill unveiled the $US5 billion (about $A7 billion) target for the company to invest in emerging new energy markets by 2030 as part of its strategy to make it through the energy transition and survive.
But for many investors she more importantly also made it clear the company would not be abandoning its core business – LNG or the oil from its own wells and those in the BHP deal.
“We expect LNG to remain an important part of the energy mix in our region for decades to come, both as a lower-carbon source of fuel for coal-dependent countries and as convenient firming capacity for renewables,” Ms O’Neill said at an investor briefing on Wednesday.
She said the significant investment target in new energy is aimed at positioning the company as an early mover in this evolving market and supporting the decarbonisation goals of customers.
“We have a vision to build a low cost, lower carbon, profitable, resilient and diversified portfolio. Woodside aims to do this by leveraging our world-class Tier 1 portfolio and allocating capital to the right opportunities at the right time.
The billions to be spent will come from the company’s cash flows over the next decade and that means LNG exports and the associated oil production will have to continue.
In the briefing Ms O’Neill did not say where the $7 billion will be spent but she did highlight recently revealed projects in Australia and the US.
These include producing hydrogen and ammonia from the Kwinana industrial site, south of Perth. Another project in the Bell Bay area of Tasmania would use hydropower and wind to produce the same energy types.
“In recent months we announced progress on four new energy projects: H2Perth and H2TAS in Australia and Heliogen and H2OK in the US. Our projects are designed to be phased, starting small with the potential to build scale. In each case the project location has been chosen for specific reasons, preferably near available renewables or close to market, ensuring they are customer led.
“We expect that in the mid-2020s the transition to new energy will be underway, including the start-up of the first of our own projects,” she added.
According to Woodside investors can expect lower returns and longer time frames for these projects than its oil and gas ones with so-called new New energy projects would provide a rate of return of more than 10% within 10 years, according to Woodside’s capital allocation framework.
This compared to returns of more than 12% and 15%, and shorter time frames, for the company’s oil and gas investments which is understandable because these are in technologies well understood and developed and operating in markets with the same level if understanding.
“Our investment decisions are informed by robust market analysis, so we understand macro trends for our products and a range of outcomes dependent on different climate scenarios,” Ms O’Neill told the briefing.
Individual opportunities are assessed through a disciplined capital allocation framework and clear investment criteria, always considering the fit with our emissions reduction targets and shareholder returns.”
“In 2021 Woodside delivered on what we set out to do – tackling costs, achieving final investment decisions on the Scarborough and Pluto Train 2 projects, continuing delivery of Sangomar and progressing our new energy opportunities – plus we announced a proposed merger with BHP’s petroleum business.
“The rationale for the merger with BHP’s petroleum business is compelling. After completion, Woodside will have a larger, diversified portfolio of long-life assets and increased cash generation to build resilience and support future investment and shareholder returns.
“The merged portfolio would have an exciting pipeline of near-term developments: Sangomar in Senegal; Mad Dog Phase 2, Shenzi North and other attractive opportunities in the Gulf of Mexico; and Scarborough offshore Western Australia. These, together with other potential oil, gas and new energy developments, will provide an enviable hopper of opportunities competing for capital.
“Scarborough truly is a world-class project and the development of its 11 trillion cubic feet of gas through the expanded Pluto LNG facility is a gamechanger for Woodside. The project has an internal rate of return of more than than 13.5% and a globally competitive cost of supply of LNG delivered to north Asia of
$5.8 per MMBtu.
“We are planning to thrive in a lower-carbon future. Our net emissions reduction targets of a 15% reduction by 2025 and a 30% reduction by 2030, with a net zero aspiration by 2050 or sooner, are unchanged and will apply to the proposed merged portfolio.
“It is important to note that these emissions targets apply to our entire equity portfolio, both operated and non-operated. We intend to achieve them by designing new facilities to be more efficient, operating our existing facilities more efficiently, and offsetting the remainder,” the Woodside CEO declared.
