Browsing through Woodside
Recommendation
The door to hell is real and it's in Turkmenistan. For forty years, a crater 260km from the capital has been on fire – spewing boiling mud and orange flames, attracting tourists and scaring locals.
Soviet engineers stumbled upon the Darvaza crater while looking for oil in the 1970's but found gas which they tried to flare off. The flare, expected to last a few weeks, instead turned into a decades long bonfire.
Over the next 48 years, while the crater burned, the role of gas would be transformed.
Key Points
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Potential new deal at Browse
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Woodside is monetising stranded assets
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Investment case on track
Gas is no longer a burden. In fact, it is so valuable it has spawned new industries in pipelines, processing facilities and LNG to ensure it is all captured and used.
Woodside Petroleum has been at the pointy end of that transformation. It was the first Australian business to propose using LNG to monetise gas and, ever since, it has specialised in finding lonely gas fields and making money from them.
Pluto, the North-West Shelf, Scarborough and Wheatstone are all examples of once-stranded gas fields (which lacked a connection to pipelines to transport molecules to customers) that today power vast LNG processing facilities ('trains') to generate power and profits.
Yet one region has long eluded the company, always promising production but never achieving it. That might be about to change.
Enter Browse
The Browse gas fields comprise three separate gas accumulations, which, in aggregate, form the largest untapped conventional gas resource in Australia. With more than 16 trillion cubic feet (tcf) of gas, the project is four times larger than Pluto.
First discovered in 1971, these fields have seduced chief executives for decades but none have been able to commericalise them. There are several problems.
A long-standing one is high levels of carbon dioxide embedded in Browse gas. It requires specific onshore processing (and possible compression) so not every processing facility can accept Browse Basin gas cargoes. More simply, the fields are a long way from shore – about 400km – which means capital costs for projects are high.
Commercialisation estimates started at $10bn in the early 2000s and reached as high as $60bn a few years ago. Even with a resource this size, that cost cannot be absorbed. Finally, a complex ownership structure made decisions slow and consensus hard to find.
Let's make a deal
Woodside has overcome many of these problems and convinced partners in both Browse and the North West Shelf – Australia's largest LNG hub – to agree to a processing agreement.
If everyone agrees, this will mean Browse gas is piped directly to North West Shelf (NWS) processing facilities in Karratha. That is no easy task and involves installing a labyrinth of subsea equipment and hundreds of kilometres of pipelines, but it will finally result in monetisation of Browse gas.
The NWS partners will recieve a fee from resource owners to process gas, instantly solving several problems. The NWS will run out of gas early next decade. Rather than spend cash looking for new feed, partners can plug in an existing resource and keep expensive infrastructure humming. It's a great deal for Browse owners, providing high returns on a lower capital base.
This is our original investment case in action (see Appreciating Woodside's assets).
It's alive!
We've argued that Woodside was being maligned for poor production and resource expansion but the value of its infrastructure compensated for gas shortfalls. Twice, in the space of several months, Woodside has proved that it can cheaply and easily expand its production. The problems that worried the market are being solved.
The Scarborough deal will monetise a large gas field and increase margins at the Pluto LNG project, while a deal at Browse will do the same for the owners of that resource and the NWS. Woodside, as an equity partner in both ventures, will do nicely. It will ensure ongoing production from a key asset and start monetising gas from a previously stranded one.
We've previously valued the Browse project at zero. That will change but the tariff rate hasn't yet been set nor any contract signed so it's premature to bank additional value. It is clear, however, that slumbering Woodside is waking and our investment case is on track. For now, HOLD.
Note: The Intelligent Investor Equity Growth and Equity Income portfolios own shares in Woodside. You can find out about investing directly in Intelligent Investor portfolios by clicking here.