A slice of Woodside fortune

Woodside's $US2 billion sale of a slice of its equity in the giant Browse LNG development is something of a game changer for both the development and Woodside.

It's not surprising that Woodside's share price shot up 4 per cent immediately after it announced the agreement to sell an effective 14.7 per cent of the project to the Japanese partnership of Mitsui and Mitsubishi, or MIMI.

The price tag of that equity – a 16 per cent interest in the East Browse joint venture and an 8 per cent interest in West Browse – values the equity in the $30 billion development at $13 billion.

It also reduces Woodside's share of the funding for the project from 46 per cent to 31 per cent. There had been concerns about Woodside's ability to fund its share of the capital expenditure program, which led to Woodside's decision to explore the appetite for the sale of a minority position earlier this year.

Its relatively new chief executive, Peter Coleman, however, has demonstrated a fairly conservative and disciplined approach to managing the group's portfolio of potentially vast LNG interests and the deal with MIM helps de-risk Woodside's exposure to Browse.

The MIMI partners, who also have a one-sixth interest in the Woodside-operated North West Shelf project, have also struck a deal with Woodside, subject to completion of the equity purchase, to buy about 1.5 million tonnes a year of LNG from the project. The equity arrangement could be undone by pre-emptions held by the other joint venture partners BHP Billiton, BP, Chevron and Shell.

The relationship that Woodside has negotiated with MIMI and their advisers at Citi isn't simply an equity and gas sales arrangement but it part of a broader alliance that would see them jointly marketing co-mingled LNG into Asia and particularly Japan. MIM will help arrange "competitive" funding for the Browse development from Japanese banks and Mitsui and Mitsubishi have a non-binding agreement with Woodside to potentially collaborate on other opportunities globally.

The Browse joint venture partners had originally planned to make a final investment decision by the middle of this year but last month negotiated an extension to their lease agreements with the federal and state governments that will give them until the first half of next year to commit to the project, which would see the gas processed onshore, controversially, at James Price Point, about 60 km north of Broome in Western Australia.

Alternatively, with the Browse partners more aligned with the NW Shelf partnership if today's deal is implemented, the Browse gas could be piped to the existing NW Shelf plant to offset declining reserves from that project's gas fields.

The announcement of the sale of equity in Browse comes only days after the much-delayed $15 billion Pluto development produced its first gas, making this something of a landmark moment for Woodside.

The deal and the associated LNG purchase agreement also provides a demonstration of the continuing demand for LNG in Asia, despite the prospective massive increase in supply from a raft of new mega-projects, including those offshore WA and the coal seam gas-fed projects at Gladstone in Queensland.

There is an interesting contrast between the continuing strength of that demand for energy that trades at global prices linked to the oil price and the collapse in shale gas prices in the US, where a glut of new supply has seen the price dive from north of $US6 per 1000 cubic feet to less than $US2.30 per 100 cubic feet.

The US gas is trapped within the US domestic market – there aren't any export LNG terminals that would enable the US producers to take advantage of the massive arbitrage opportunity available if the gas could be exported and attract the global price.

An issue for the global market is whether that will change in future. The availability of cheap gas in the US is transforming its energy demand and supply equation, reducing its reliance on imported oil.

That could have long-term geo-political implications, particularly as it relates to the US post-war pre-occupation with the Middle East, but it also has prospective short- and long-term economic implications.

If the US doesn't ‘import' global gas prices by allowing its shale gas to be exported, it could have access to very low cost energy as well as the cheap pool of labour created by the high levels of financial crisis-inspired unemployment.

In the long term the reserves of shale gas could represent significant comparative advantage even as Asia, whose employment costs are rising with living standards, is locking in long-term supplies of gas at global prices.