Slugcatcher and the new threat to Scarborough LNG

THIS week’s sale of a 49% stake in stage two of the Pluto project is good news for Woodside Petroleum, but the threat of a gas reserves downgrade and legal challenges continue to dog the company’s Scarborough gas field as Slugcatcher watches it edge towards a green light.
Slugcatcher and the new threat to Scarborough LNG Slugcatcher and the new threat to Scarborough LNG Slugcatcher and the new threat to Scarborough LNG Slugcatcher and the new threat to Scarborough LNG Slugcatcher and the new threat to Scarborough LNG

Slugcatcher

Investors are clearly concerned about the threat of a delay which is one reason why Woodside shares have fallen over the past month at twice the pace of arch-rival Santos.

Another factor at work in the market could be the negative publicity flowing out of the recently completed COP26, the Glasgow climate change conference towards all forms of fossil fuels.

But the issue no-one seems to be considering is the sudden outbreak of brotherly love in the often-strained relationship of China and the US

Signs of a new-found friendship first appeared in Glasgow when the two giants of the global economy said they would work together on a plan to help reduce carbon dioxide emissions to slow the pace of global warming.

Encouraging as that sounds, largely because any move to lower the temperature in China v US relations has to be welcomed, it was not a good news development for Australia's LNG industry.

Of particular interest to The Slug was a note published by Macquarie Bank which highlighted the close and growing business relationship between China and the U.S.

Boiled down to a single number, the problem for Australia (and Woodside in particular) is an estimate that the US has the potential to almost double LNG capacity from its current 77 million tonnes a year to 142MMtpa - plus the potential to continue expanding.

At 77MMtpa the U.S. LNG industry is roughly the same size as that of Australia and Qatar but there seems little doubt that with 30MMt of new export capacity under construction at projects such as Golden Pass, Calcasieu Pass and Sabine Pass the US will quickly slip over the 100MMtpa mark.

Another 35MMt of US capacity is heading for final investment decisions (such as Corpus Christi, Plaquemine and Driftwood) taking total U.S. export to 142MMt. Qatar is also expanding rapidly to catch a gas-hungry global market.

If it was only a case of every new tonne of LNG entering the world market meaning less room for a rival tonne then the dramatic pace of US expansion would be an interesting but not significant development at a time of growing global gas demand.

 

Quite simply, there is room in the market today for almost everyone with price the major consideration and the cheaper you can produce your LNG the better.

And that's when things might get a little squeezy for Woodside which is not only battling the perception problem of a company with an expensive LNG proposal in Scarborough but one which might not have the reserve backing demanded by LNG buyers.

The Scarborough challenge gets harder when it comes to market access because even if China has become a difficult customer for Australia, it is a relatively close market and a natural outlet for Woodside's LNG - if the US and Qatar don't stitch up China for themselves.

In Macquarie's words, China has "jammed open the US LNG floodgate" a way of saying that it's Chinese demand from buyers such as Sinochem and Sinopec which is underwriting the rush of US LNG expansion.

Not mentioned, because it came after Macquarie had publish in the middle of last week is the China and US alignment on climate change programs which almost certainly include a greater use of LNG as part of a transition to renewable sources of energy.

"In recent weeks, numerous LNG contracts have been signed by China and the US," the bank said.

"The barriers preventing the natural marriage of low cost and flexible gas supply (US shale) with the largest and structurally growing LNG consumer (China) appear to have been overcome and more contracts should follow."

There was no mention in that particular piece of research of a place for Australia in the China + US alliance.

Rather there was a separate warning about the reserves problem dogging Woodside with concern that Scarborough could be in line for a downgrade similar to what which have hit the Wheatstone and Pluto gas fields.

Other banks have also pointed out the risk of a Scarborough downgrade but what Macquarie did was draw client attention to the anomaly of Woodside reporting a resource in the field 11.1 trillion cubic v BHP's resource estimate for the same field of 7.8tcf.

There could be many reasons for the 29% lower estimate of Scarborough by BHP with timing one of them and technical assumptions another.

But the resource estimation difference is one of the reasons why investors have gone a little cold on Woodside, and that's before the China + US love affair over climate matters is taken into consideration.

Whether it's a China problem or not, the next few weeks for Woodside are shaping as some of the most important since the company discovered gas on the North West Shelf some 50 years ago - and has been living off that legacy ever since.