Woodside sale makes good sense

Countryman

If you're a shareholder of Woodside Petroleum I wouldn't be too concerned about recent headlines regarding Woodside looking to sell down part of its 50 per cent stake in the Browse LNG project.

This news is not an act of Woodside 'stopping out', or 'cutting their losses', rather it is simply part of an ownership restructure that would line up with current industry practices.

When developing these huge LNG projects, such as Gorgon, Wheatstone, Pluto or Browse, no oil and gas company goes in alone because of the sheer magnitude (these are multi-billion dollar projects) and risk of the project.

You always have the lead company who is set to operate the facility, and in the background you have a number of other companies, usually competitors, with a finger in the pie.

Take Chevron's Gorgon Project on Barrow Island. Chevron is the operator with a 47 per cent stake, while Shell and Mobil each hold a 25 per cent stake, with the other 3 per cent split between future customers Osaka Gas, Tokyo Gas and Chubu Electric Power.

My point is that convoluted (but inherently strategic) ownership structures aren't uncommon.

Now if you take a look at the Woodside-operated North West Shelf Project there are six partners: Woodside, Shell, BHP Billiton, BP, Chevron and MIMI (a joint venture between Mitsubishi Corporation and Mitsui) which each have a 16.67 per cent stake.

The North West Shelf Project has been producing oil and gas since the mid-1980s and is the source of the majority of oil and gas profits (and royalties) in WA each year.

Naturally over time, production from the North West Shelf Project, which is processed at the Karratha Gas Plant, will decline and new gas sources will have to be found.

Realigning the Browse ownership structure to match the ownership structure of the North West Shelf Project would make it significantly easier down the track to feed any additional gas from the Browse gas fields into the North West Shelf Projects Karratha Gas Plant.

There are already similarities between the Browse and the North West Shelf ownership structures, with Woodside currently owning 50 per cent of Browse, Chevron and BP 16.67 per cent each, and BHP and Shell both hold 8.33 per cent.

So to match the ownership structures you would see BHP and Shell double their existing stakes in Browse, and the Mitsubishi Corporation and Mitsui joint venture MIMI buy into the project for a 16.67 per cent stake.

Now this doesn't mean the existing proposed Browse LNG Plant, which is 60km north of Broome, won't go ahead, rather the move would achieve two goals.

Firstly it would divest Woodside's risk in the Browse project, and reduce the company's capital commitments. With Woodside still trying to produce first LNG from the much delayed Pluto project it's a risk that I think new chief executive Peter Coleman would be more than happy to share because the company has learnt the hard way the implications of major project delays.

Secondly, it provides an alternative processing path for Browse gas should there be any issues with the Broome processing facility.

So if you're a Woodside shareholder I wouldn't be too concerned if its sells part of the Browse project in the near future, rather I'd be more concerned if they didn't. Aligning the ownership structures of Browse to match that of the North West Shelf Project makes a lot of sense.

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_Information contained in this article does not consider your personal circumstances. You should consult a stockbroking professional before making any investment decisions. Sentinel may hold positions in stocks discussed from time to time. _

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