Chevron Exit Could Trigger Wider Australian LNG Shakeup
The global shake-out of oil and gas assets has reached Australia with Chevron Corporation planning to sell its 16.7% stake in the country’s original and biggest liquefied natural gas (LNG) project.
A foundation partner in the North West Shelf joint venture, Chevron has bigger stakes in two other Australian LNG developments, a 47.3% interest in the Gorgon development and 64.1% of the Wheatstone project.
Over the past 40 years Chevron is estimated to have invested more than $100 billion in its three Australian LNG assets.
Culling the oldest from its portfolio is a logical move by Chevron but there are other factors behind the decision to quit the North West Shelf.
Low prices for oil and gas are an obvious factor as all oil companies contract back to their most profitable projects, and because its been operating for more than 30 years it is unlikely that the North West Shelf matches the performance of the newer investments when it comes to return on capital invested.
A Cumbersome Joint Venture
But another factor could be the corporate structure which controls the North West Shelf, a cumbersome joint venture in which all six partners have an equal say in investment decisions.
Problems in aligning the interests of all partners, a group that include Royal Dutch Shell, BP, BHP, Woodside Petroleum, and Japan Australia LNG (jointly owned by Mitsubishi and Mitsui), has frustrated everyone with the latest problems revolving around disagreement on when (and how) to develop new gas deposits to ensure the continued operation of the old project.
Plans to deliver gas from the remote Browse gasfields via a 500 mile submarine pipeline to the North West Shelf have effectively been dropped because of high development costs and low gas prices.
Similar problems are being encountered with a back-up project called Scarborough and with plans to turn the ageing project into a toll treating business to process third party gas.
Right To Match Bids
What could become quite interesting with Chevron’s proposed North West Shelf sale is the effects of the legal structure under which it operates. In most cases Australian corporate law specifies that other partners in an unincorporated joint venture have the right to match the price offered by an outsider should a member opt to sell its stake.
In theory, that clears the way for other partners to lift their stake though the only company likely to be interested in acquiring Chevron’s interest is Woodside, the smallest venture member and also the company classified as project operator.
Woodside has a strong balance sheet and is known to be looking for growth opportunities and a bigger share in a project it knows intimately might be an easy move, if the price is right.
Early speculation points to Chevron asking for $4 billion for its 16.7% stake but whether that’s realistic at a time of low oil prices seems unlikely.
Widespread Exit From Australian LNG
Whatever the sale price the more interesting aspect of the sale is whether it might trigger a widespread exit by other venture members from the oldest of Australia’s LNG projects.
Last month, analysts at Credit Suisse, an investment bank, said the Australian oil and gas industry was likely to see a rush of mergers and acquisitions, including a shake-up of the North West Shelf.
Significantly, Shell, BHP and BP were listed as possible sellers of the their interests. Chevron was not. However, Credit Suisse did name Chevron as a potential seller of its Gorgon and Wheatstone assets.
By putting its 16.7% stake in the North West Shelf on the market it is possible that Chevron has beaten its partners to the exit
But it’s equally possible that the other partners in the project will follow Chevron out the door, leaving Woodside as the dominant investor able to more easily make investment decisions.