Australia M&A - Sumitomo & Sojitz agree to acquire 10% stake in Scarborough from Woodside

Today, Woodside Energy have announced that they have entered into a sale and purchase agreement to divest a 10% stake in the Scarborough project to LNG Japan, a 50:50 JV between Sumitomo Corporation and Sojitz Corporation. The deal has an effective date of 1 January 2022 (essentially from FID) and is expected to close in the first quarter of 2024.

The purchase price for the deal is US$ 500 million plus historical expenditure from the effective date to the close date, with the estimated total consideration being approximately US$ 880 million.

The Scarborough project

The Scarborough field is located approximately 375 km off the coast of Western Australia. Woodside have held an interest in the asset since 2016, when they acquired a 25% stake from BHP (who had held 50%), and became operator when they acquired ExxonMobil's 50% stake in 2018. In June 2022, Woodside announced a deal to merge with BHP's upstream division, giving them 100% interest in Scarborough.

FID for the Scarborough development (which included the Scarborough field and Pluto Train 2) was taken in late-November 2021, with the field being developed using subsea wells and a submersible floating production unit (FPU). From the FPU, the gas will be sent to shore through a 430 km pipeline. Scarborough gas is underpinning the development of Pluto Train 2, where it will provide all of the gas to support the nameplate capacity of 5 mpta. It will also provide backfill for Pluto Train 1, to support up to 3 mpta of LNG exports. Finally, 225 TJ/d will be supplied to the domestic market.?

I looked at the gas balances at the various west coast LNG plants in my article on January 3, 2023. The chart below captures this for Scarborough gas, with the addition of the domestic market sales.

Woodside motivation

Woodside had held 100% in both the upstream (Scarborough) and LNG (Pluto T2) elements of the project, exposing them to significant capital risk with a combined estimated CAPEX of US$ 12 billion. To reduce this risk, Woodside launched separate farm-down processes for both Scarborough and Pluto Train 2 in July 2021. In November 2022, Global Infrastructure Partners (GIP) agreed to acquire a 49% stake in Pluto Train 2, leaving Woodside with 51% in Pluto T2 and 100% in the Scarborough project.

This latest deal dilutes Woodside's stake in Scarborough to 90%, which is inline with the Pluto LNG project where two different Japanese companies, Kansai Electric and Tokyo Gas split the remaining 10%. Woodside could look to bring in additional partners at Scarborough or they may be comfortable with their new position.

For Woodside, this provides a nice reduction in the capital risk as well as ties into the Japanese LNG market, which is traditionally the biggest export market for Australian LNG.

LNG Japan motivation

LNG Japan is a 50:50 JV between Sumitomo Corporation and Sojitz Corporation. They have an existing interest in two other LNG projects: Tangguh LNG in Indonesia (7.35% of the unitised project) and the Ras Laffan LNG project in Qatar (3%).

To me, it shows that Japanese companies have realised that LNG will remain an important energy source for the country, regardless of the pace of the energy transition. This deal provides them with an equity share of the LNG as well as non-binding heads of agreement for the sale and purchase of 12 LNG cargoes per year (approximately 0.9 million tonnes per annum) for 10 years commencing in 2026.?

Deal value

In my article on January 3, I provided an estimated valuation of 100% of the Scarborough project, from FID, of $6.5 to $10 billion, so a total consideration of US$ 880 million falls nicely within these bands.

At the time, I noted that one of the key valuation parameters was the tolling agreements through both Pluto Train 1 and Pluto Train 2. This remains the case and it will be interesting to see if any guidance is given of these values.