I was surprised to read this morning that executives at Woodside Petroleum Limited (ASX: WPL) have reportedly entered into negotiations with Chinese officials in Guangdong this week over the company's $25-billion dollar contract previously agreed.
As I wrote in a previous article, the contract sees the 'North-West (Shelf) Consortium' (led by Woodside) supplying gas to China for a 25-year period at less than half of the present market value of natural gas.
The contract was signed back in 2002 in a buyer's market, which meant that there was no provision to renegotiate price as market conditions fluctuated.
While this potentially protected Woodside from losses (if the market declined) at the time, it has caused the company to miss out on millions of dollars in profits in subsequent years by supplying gas with lower margins.
Chinese officials have recently accused the consortium of withholding 10% of gas shipments since 2011 in order to force a renegotiation, while Woodside has avoided commenting on the matter.
I personally felt that negotiations had a 'snowball's hope' of succeeding, considering that Woodside was apparently legally bound to supply the shipments and Chinese business interests are (quite rightly) often uncompromising in the face of strong-arm tactics by global corporations.
The other potential risk was that governments might get involved, since China has a duty to its citizens to maintain energy supplies for its population, while Australia is obviously interested in shoring up our trade balance after recent falls in the value of oil and iron ore.
However it may be as simple as reliable gas shipments being worth an extra premium to the Chinese buyers.
While there is no guarantee of a positive adjustment to the contract, any change should have a significantly positive effect on Woodside's already solid North-West Shelf margins.
Woodside could also be squeezed for some meaningful cash in the short term, if compensation for missed shipments is demanded in return for price adjustments.
Though with that said, turning a $25-billion dollar contract into a market price contract of over $50 billion would be a good day's work in anyone's books.
