Australia's Woodside to sell 10% stake in Scarborough project to LNG Japan

Australia's Woodside Energy said Aug. 8 it has signed a set of agreements with LNG Japan, under which it will sell a 10% non-operating participating interest in the Scarborough Joint Venture and sell 12 LNG cargoes/year (about 0.9 million mt/year) for 10 years from 2026.

Once the Scarborough project comes onstream, LNG Japan would lift up to 1.7 million mt/year of LNG from a heads of agreement for the sale and purchase of 0.9 million mt/year, together with its equity LNG offtake of up to 0.8 million mt/year from the project.

Under a sale and purchase agreement with LJ Scarborough Pty Ltd, a wholly owned subsidiary of LNG Japan, Woodside will sell the 10% non-operating participating interest in the Scarborough Joint Venture for a deal expected to complete in the first quarter of 2024 at about $880 million after authority approvals.

"The support of LNG Japan is [a] testament to the quality of the Scarborough project. It also underscores the ongoing demand from Japanese buyers for new supplies of gas and the role of gas in supporting Japan's energy security," Woodside CEO Meg O'Neill said in a statement.

LNG Japan, a 50:50 joint venture between Sumitomo and Sojitz, also participates in the Tannguh LNG project in Indonesia and the Ras Laffan LNG project in Qatar.

Policy impact

LNG Japan's announced participation in Woodside's Scarborough project was a surprise in Japan, where local companies are increasingly finding it difficult to commit to any new long-term LNG supply contracts in the face of demand uncertainty in years ahead due to the country's 2050 carbon neutrality target.

Amid expectations of LNG playing a pivotal role as a transition energy in Asia, LNG Japan sees its participation in the Scarborough project would not only help ensure the fuel supply in the region but would also contribute towards Japan's energy security, an LNG Japan spokesperson said.

The deal also comes as Japanese buyers of Australian LNG are concerned about reforms to Australia's Safeguard Mechanism that took effect July 1, which will have a significant impact on LNG business and import costs for Japan.

The Safeguard Mechanism applies to industrial facilities, including oil and gas production and mining operations, that emit more than 100,000 mt/year of CO2 equivalent, and requires offsetting of CO2 emissions through steps such as purchasing carbon credits or carbon capture and storage.

The mechanism requires affected facilities to cut net emissions by 4.9% annually through 2030, while new facilities, including gas fields such as the Scarborough project, are expected to have a baseline of net-zero emissions from the start of operations.

"Woodside's Scarborough project is competitive under the new regulatory requirements. The Scarborough reservoir contains less than 0.1% carbon dioxide and combined with processing design efficiencies at the floating production unit (offshore) and Pluto Train 2 (onshore), will deliver one of the lowest carbon intensity projects for LNG delivered into Asian markets," a Woodside spokesperson said.

"The Scarborough project is of strategic importance to Woodside and to our neighbors in the region and will continue to play a critical role in the Woodside portfolio as we thrive through the energy transition."

Equity lifting

Following completion, Woodside will hold a 90% interest in the Scarborough Joint Venture and remain as operator. Scarborough gas will be processed at the Pluto LNG facility, where Woodside is currently constructing Pluto Train 2. Woodside is also the operator of the Pluto Train 2 Joint Venture and holds a 51% participating interest.

The Scarborough Joint Venture comprises the Scarborough field located approximately 375 km off the coast of Western Australia. The Scarborough field will supply gas to support the production of up to 8 million mt/year of LNG and domestic gas equivalent to 15% of LNG output, which will be reserved for domestic use in support of the State of Western Australia's domestic gas policy.

About 5 million mt/year of Scarborough gas will be processed through Pluto Train 2, with up to 3 million mt/year processed through the existing Pluto Train 1, LNG Japan said, adding that it will lift up to 0.8 million mt/year of LNG for its independent marketing with its 10% equity participation in the Scarborough Joint Venture.

The Scarborough project targets the first LNG cargo in 2026 after a final investment decision in November 2021.

The Scarborough project will include the installation of a floating production unit with eight wells drilled in the initial phase and thirteen wells drilled over the life of the Scarborough field.

The gas will be transported for processing at Pluto LNG through a new trunkline of approximately 430 km in length.

As part of agreements, Woodside has also entered into non-binding agreements with Sumitomo and Sojitz to explore globally new energy opportunities in areas including ammonia, hydrogen, carbon capture and storage (CCS) and carbon management technology.