Leviathan grows as Woodside's enigma
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Australian companies heading offshore rarely have a smooth run. Remember BHP, when it blew a massive hole in its balance sheet with the ill-fated $3.2 billion purchase of Magma Copper?
Then there is Brambles, which had for decades owned half of its global pallet operations, but only recently, after years of drifting, began to show signs it is master of its own destiny.
Against this backdrop, for shareholders of Woodside Petroleum, the slow progress with its planned $US1.5 billion buy into a big gas play in Israel, the Leviathan project, should come as little surprise. Even so, if it comes off, it will rank as one of the largest single investment decisions by an Australian company.
When Woodside disclosed the move just over a year ago, the reaction was muted. Like several energy outfits, Woodside has been exploring for oil and gas internationally for a while, but with limited success. So, pumping a big lick of money into a defined project would never be the cheap option. But it would offer a faster path to development returns.
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Yet progress has been slow so far, and buying into a region with the political undercurrents of the Middle East was never going to be smooth sailing. When Woodside bought in, the partners were looking to access its expertise in liquefied natural gas projects.
Even though Israel is close enough to regional markets such as Turkey and Egypt to be able to pipe gas economically, a year ago relations between these countries were fraught. Hence the open door to Woodside, since the project would need access to more distant markets if it was to proceed.
What a difference a year makes.
Now, Israel's relations with Egypt have warmed up following a change of government, as have relations with Turkey, so that pipeline options are back on the table.
In the process, the prospective role for Woodside may have dwindled, leading to recent talk in Israel that Woodside will walk. That may be premature, although finalising any Woodside participation has slipped back until some time in the first half of 2014.
Along with sorting out the scale, and the priorities, of the proposed development, another stumbling block has been the tax regime for gas exports, which will not be sorted out for another month or two.
Given the lack of information from Woodside - which appears to be largely due to the unsettled state of the partners, coupled with the time it is taking for the government to resolve issues relating to the venture - shareholders are becoming twitchy over the status of its proposed participation.
Analysts argue Leviathan is really ''a long-dated growth option''.
''With one year having passed since the initial farm-in, the fact that there appears progress on Israeli fiscal terms could be seen by some investors as a slight positive,'' was the way RBC Capital Markets put it in a recent note. However, ''investors are increasingly eager for more clarity around plans for Leviathan''.
In this regard, recent comments by the main shareholder, Noble Energy, which has a 40 per cent stake, that a staged development is on the cards was the first clear information about what is going on. Included in these options is piping the gas, which will lift prospective returns as well as throw up a range of development options.
For Woodside, the issue now is whether it will take part in the entire project, including any pipeline, or be limited to the proposed liquefied natural gas portion only.
Complicating any decision is the 20 per cent increase in the size of the known resource which, with the improved economics from any pipeline exports, could force Woodside to pay more to buy in - as much as $US3 billion, or twice the initial amount for a 30 per cent share, on some estimates.
Already, Turkey is looking at taking an estimated 3 billion cubic feet a year in a 15-year contract. Given that this contract alone would cover the estimated $US2.5 billion cost of building a pipeline, the reason for pushing up the price for Woodside's participation is straightforward.
With the Leviathan partners now talking about ''multiple phases'' in the project, and given the low-cost upfront option of regional supplies, this provides a handy way to tap cash flow to fund expansions while boosting project economics.
Domestic sales will flow first, then regional sales via pipelines and ultimately floating LNG, presumably tapping Shell technology, which Woodside is accessing as part of its own development options for the giant Browse project off the coast of Western Australia.
''All parties are … engaged in negotiations and are targeting a structure that allows us to recognise the increased value that we see coming forth from Leviathan,'' Noble told analysts in this month.
Woodside shareholders can only take these comments on faith because there has been no fleshing out of the impact of the changed project dynamics on the company's proposed participation.
That said, Woodside has said it will only pursue participation if there is upside for its shareholders - a ''compelling value case'' given the size of the proposed investment.
This is a clear case of seeing is believing.
Read more: http://www.smh.com.au/business/leviathan-grows-as-woodsides-enigma-20131227-2zzo1.html#ixzz2ohFSzlao
Link to source: http://www.smh.com.au/business/leviathan-grows-as-woodsides-enigma-20131227-2zzo1.html
