With global oil and gas (LNG) prices surging in the three months to September 30, it was no surprise that the country’s two leading independent producers – Woodside and Santos – did very well, reporting big jumps in revenue and earnings.
And, as is clear from management’s comments, both companies (which are in the throes of expanding through takeovers) see the good times continuing in the current 4th quarter.
Oil prices are now well above $US80 a barrel and looking like they will remain there into early next year while LNG prices are closer to $US50 per mBTU (million British Thermal Units, a measure of the contained energy in a given amount of gas) because of China’s mad scramble to fill a shortfall of energy supplies ahead of the northern winter.
China’s desperation has lifted prices already boosted by the continuing gas shortage across Europe and the UK.
But for Woodside there was bad news on the size of its reserves in two key WA gas fields which seem to have shrunk alarmingly.
Woodside more than doubled September quarter revenue to $US1.531 billion from $US699 million of the same quarter of 2020 when demand was depressed, along with prices by the after match of the first Covid pandemic wave and lockdowns.
September quarter revenue was also up 19% from June’s $US1.285 billion.
Woodside CEO Meg O’Neill said sales revenue for the third quarter climbed 19% compared with the preceding three months on the back of stronger average realised LNG prices.
“Revenue from LNG sales during the period was 27% higher than the second quarter despite production being impacted by planned maintenance activities at the North West Shelf Project and Pluto LNG,” she revealed in Thursday’s statement.
“Our portfolio realised LNG price was $57 per barrel of oil equivalent and our strong realised oil price of $80 per barrel reflects continued demand for Vincent crude in oil blending markets.
“We expect in the fourth quarter to see the benefit of stronger pricing on our realised prices, reflecting the oil price lag in many of our contracts and recent increases in gas hub prices. Our production guidance remains unchanged at 90-93 MMboe.
“Woodside’s full-year uncontracted LNG production sold on a spot basis is expected to be slightly above 15% and includes additional November spot volume recently released to Woodside from the North West Shelf. During the quarter, we sold six equity LNG spot cargoes and we are currently expecting approximately 17% of produced LNG to be sold on a spot basis in the fourth quarter.”
Ms O’Neill said the agreement to pursue a proposed merger of Woodside and BHP’s petroleum business is progressing as planned, with negotiations to start next month and completion targeted for the second quarter of 2022.
“We are on track for our targeted final investment decision (FID) on the Scarborough and Pluto Train 2 developments before the end of this year. All major contracts and Commonwealth and Western Australia primary environmental approvals to support an FID are now in place, and commercial agreements are approaching finalisation.
“The proposed Scarborough and Pluto Train 2 equity sell-downs are progressing well, and timing of the Pluto Train 2 sell-down is aligned with the targeted FID later this year.
“We have secured emerging opportunities as part of our strategy to create a significant business in new, lower-carbon sources of energy. These include signing of an agreement to undertake a joint feasibility study into the development of an ammonia supply chain from Australia to Japan and a commitment to invest in HyStation, a company which aims to accelerate the conversion of bus fleets in South Korea from diesel to hydrogen.
“In addition, in October we announced our collaboration with Heliogen to begin procurement for a5 megawatt commercial-scale demonstration facility using Heliogen’s AI-enabled concentrated solar technology,” she said.
As upbeat as that all sounds, the report buried a major future problem for Woodside – some of its cornerstone assets are smaller than previously thought.
That means the long-term outlook for production from the huge Wheatstone Project off the WA northern coast is weaker than previously thought.
Operated by Chevron on behalf of the Wheatstone Joint Venture, the project processes gas from the offshore Wheatstone, Iago, Julimar and Brunello gas fields.
Woodside owns 65% of Julimar and Brunello, and has a 13% stake in Chevron’s Wheatstone LNG plant where the gas is processed. The project generated $US486 million in sales for Woodside in 2020.
But the company warned in its update the size of the gas reserves of Julimar and Brunello fields is far lower than previously assumed.
Woodside said that studies of the reservoir of both fields (using seismic of well performance and well drilling results) have cut their proved developed reserves from 54.5 million barrels of oil equivalent (MMboe) to just 11.5 MMboe.
Woodside said that saw proved total reserves at 113MMboe, down from the 154 MMboe estimate previously. 2P – Proved plus probable developed reserves were reduced to 26 MMboe, less than a third of the previously estimated 86 MMboe, and the estimate for 2P total reserves was adjusted from 231 MMboe to 168 MMboe.
The remainder of the Julimar and Brunello fields is owned by Kuwaiti national oil company KUFPEC.
The Chevron-operated Wheatstone-Iago field, which supplies most of the gas to the 8.9 million-tonnes-a-year LNG plant, is not affected by Woodside’s announcement.
But analysts will now watch the 2021 annual results for any impairment of the value of both fields.
A write-down is expected because both fields can’t produce future cash (impairment tests look at the cash generating ability of each unit or set of assets) at the same rate they were expected to before the studies were started.
Woodside shares fell 2.3% to $23.95 thanks to the news of the shrinking reserves.
Meanwhile Santos reported a record-breaking $US1.14 billion in quarterly sales revenue for the three months to September as gas and oil prices rose.
On top of the surge in revenue, free cash-flow jumped 33% to a record $US359 million ($477 million) for the quarter.
Santos said its average realised LNG price of $US10.36 per million British thermal units was more than double the price at the same time last year.
Of Santos’ 69 LNG cargoes shipped during the September quarter, 12 cargoes were sold on the Asian spot market amid sky-high prices, which recently passed an unprecedented $US50 per million British thermal units.
“At current commodity prices, Santos should generate close to US$1.3 billion in free cash flow for the full year,” Santos managing director Kevin Gallagher said in Thursday’s statement.
Adelaide-based Santos is progressing plans to merge with rival Oil Search to create a $21 billion regional giant which will be just smaller than the BHP-Woodside merged businesses
Mr Gallagher said the merger was on track to be completed by the end of the year, subject to approvals from Oil Search shareholders.
“I’m very happy with how the merger is progressing,” he said.
Mr Gallagher said the merger would create a “regional champion” with better ability to self-fund growth and seize on opportunities to expand into clean-energy technologies such as carbon capture and storage (CCS) and zero-emissions hydrogen.
Santos shares fell 1.1% to $7.20.