The BHP/Woodside deal changing the face of Australian oil
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The deal changing the face of Australian oil

By Matthew Farmer 08 Sep 2021 (Last Updated September 21st, 2021 09:22)

A multi-billion dollar merger will double Woodside’s value in 2022. How will Australia's energy landscape change between now and then, with COP26 fast approaching?

The deal changing the face of Australian oil
After the merger, Woodside will firmly sit on top of oil in Australia. Credit: Woodside.

A multi-billion dollar merger will soon push Woodside to the top of oil and gas in Australia. The enlarged company will expand its reach and double its value when the deal completes in mid-2022. But how will Australia’s energy landscape change between now and then, with COP26 fast approaching? 

In mid-August, Australian resource titans Woodside and BHP announced a merger, consolidating competition at the top of the country’s economy.

The deal, set to complete in the second quarter of 2022, pushes Woodside firmly ahead of its closest Australian competition, Santos. Company directors say it would put them in the top 10 highest-producing independent oil companies in the world.

Australia’s comparatively small oil reserves mean it rarely holds the attention of the oil and gas world. After the BHP deal, Woodside would effectively become the face of Australian oil and gas, with global reach and an impressively low cost of production.

The BHP/Woodside deal

In a teleconference accompanying the news, Woodside chairman Richard Goyder said: “The combined oil and gas portfolio transforms Woodside by doubling production, diversifying the portfolio, and offering multiple growth opportunities. This would create a top 10 independent energy company, by production.”

Goyder went on to say that the company’s new financials would allow development in the near-term “and low-carbon opportunities into the future”. Bringing these assets under Woodside’s roof also brings them under its emissions reductions targets. The company aims for a 15% drop in emissions by 2025 and a 30% drop by 2030.

At the same time, Woodside appointed new CEO Meg O’Neill. She told investors that the proposed merger would see Woodside take control of BHP’s oil and gas business, while BHP would take 48% of Woodside stock. It would also push the company’s value above $30bn (A$41bn).

While this remains hundreds of times smaller than international majors, it would add approximately 50% to the company’s market cap. This pushes it up to have a similar market cap to Phillips 66, Canadian Natural Resources, and Schlumberger. As the deal progresses, O’Neill said Woodside would consider listing itself on stock exchanges in New York and London.

Australia’s place in oil and gas

The minerals of the outback overshadow Australia’s oil and gas industry, which maintains similar production to many South-East Asian countries. From a total domestic crude and condensate production of 161 million barrels in 2010/11, Australia’s production almost halved up to 2017. This then rebounded to 122 million barrels in 2020/21, including setbacks from the Covid-19 pandemic.

Australian politicians fiercely defend the country’s miners, while oil and gas enjoys some of this support by association. Mining provides a backbone for Australia’s export and trade operations, allowing oil and gas to develop significant terminal facilities.

However, the winds have changed on climate ambition. Australia’s allies have highlighted its inaction on climate change, which comes into public focus during worsening wildfire seasons. Farmers and academics have encouraged the government to set net-zero targets by 2050. Now, even the country’s oil and gas trade association has joined the lobby. This target may not prove sufficient to avoid regular climate disasters, but it would mark an improvement on current targets.

Merger made for miners, or are BHP more interested in exiting oil?

BHP Group frequently claims the title of most valuable mining company, and mineral extraction has always remained its priority. Since 2013, BHP’s petroleum production has more than halved. Now, with decarbonisation on the horizon, the company has moved to part with its more carbon-intensive products.

While the government proclaims that coal has a future in Australia, BHP is offering A$275m for someone to take the Mount Arthur coal mine off its hands. It will also divest the Cerrejón mine over the next financial year, during which the company’s energy coal output will fall by up to one-third.

Add to this BHP’s delisting on the London Stock Exchange, a hub for mining companies, and the court case exposing sexual harassment among the company’s workforce, and some may see BHP as having a corporate identity crisis.

Selling BHP’s oil and gas operations seems like a comparatively simple step. Oil and gas prices have had a dramatic couple of years, with demand expected to peak soon. However, these divestments make the company more reliant on the price of iron ore. Recently, iron ore prices have proved even volatile, almost halving in the past two months. As a result, investors reacted negatively to news of the merger, seeing oil as a relatively stable commodity.

BHP has not set a net-zero target, unlike Woodside. Offloading its assets also offloads the need to decarbonise and decommission oilfields around the world, years ahead of potential targets.

Australia’s wary relationship with net zero

The Australian Government has previously ignored repeated, pointed criticism from international allies over its lack of a net-zero emissions target. This has allowed companies, particularly miners, to continue polluting and creating Scope 3 emissions with no regulatory consequences. In oil and gas, companies have independently set net-zero targets, with Woodside committing to net zero by 2050.

It seems certain that the upcoming COP26 climate conference will result in a net-zero target for Australia. However, this may come as the rest of the world advances its ambitions, leaving the country behind once again.
Furthermore, some international politicians will use the conference to propose that countries take responsibility for their emissions gains and reductions abroad. This would change the game for international operators such as Woodside, making them effectively import emissions to Australia.

The company says it is on track for decarbonisation, with O’Neill saying that cash provided by the merger could fund energy transition projects. However, she did not give details of what these could be, or how they might cover the wide-reaching assets that Woodside will soon operate.

“Tier-one” assets give low production costs to Woodside

Within Australia, BHP and Woodside have worked together on the North-West Shelf and Scarborough Gas projects. Now, Woodside will take full control of these assets, while also gaining assets in the northern Gulf of Mexico, Trinidad and Tobago, and Algeria. O’Neill described the portfolios as being of “similar size, featuring high-quality, tier one assets”.

She continued to say that the merger would allow Woodside greater flexibility in choosing its investments. Woodside seems poised to approve a final investment decision on Australia’s Scarborough field later this year, while continuing BHP’s developments in the Gulf of Mexico. After a production peak in 2024, the Scarborough development would prove an increasingly important part of the company’s portfolio, pushing it toward 250 million barrels of oil equivalent in annual production.

Between July 2020 and June 2021, these assets produced approximately 200 million barrels of oil equivalent per day. With an impressive production cost of approximately $8 per barrel, the company seems well-positioned for the $60-and-over prices encouraged by OPEC in 2022.