Woodside Energy Group Ltd (ASX: WDS) shares are under scrutiny as the oil and gas ASX share faces questions about why potential customers are ignoring a key project.
The business is working on a significant development called Scarborough in Western Australia although it's not all smooth sailing.
Image source: Getty Images
What's Scarborough?
Woodside describes the project as a natural gas resource 385km off the Western Australian coast. It says the project will "play a key role in helping neighbouring Asian countries take action on emissions reduction and meet increasing energy demand".
According to the company, the cash flow generated by the project will help fund a "range of new energy opportunities and thrive through the energy transition". For Woodside's liquified natural gas (LNG) target markets, those countries have "committed to net zero" and are replacing coal or are firming up renewables with LNG.
The idea is that Scarborough will produce 8mt per annum of LNG at capacity with a target for the first LNG cargo in 2026.
There will be new offshore facilities connected by approximately 430km of pipeline to a second LNG train (Pluto Train 2) at the existing Pluto LNG onshore facility.
Why are Woodside shares getting attention because of Scarborough?
According to reporting by various media, including the Australian Financial Review, the largest-ever long-term LNG sales contract has been signed between China and Qatar. It covers a period of 27 years and will be supplied from Qatar's planned North Field expansion. This will help Qatar become one of the world's most significant LNG exporters.
But it also raises the question about why Woodside is yet to secure a partner for its Scarborough project.
The AFR reported that Woodside CEO Meg O'Neill has outlined that partnership talks are ongoing, but the company wants to do a deal for the right value. O'Neill told the newspaper:
We continue to talk to a number of players…Our goal with Scarborough is to bring in the right partner at the right price. When we look at what's happening in the LNG market today it really reinforces the value of Scarborough. There's not a lot of other new LNG supply coming to market that's as close to Asian customers as Scarborough is, so it's a very attractive opportunity and we want to make sure we get the right partner and we get that fair value.
My 2 cents
My guess is that Woodside is just waiting in a bid to get the best price. Indeed, the CEO referenced price and value multiple times in that quote.
It makes sense that the management wants to try to sell now because energy prices are so high. But potential buyers are unlikely to want to pay top dollar during this period while LNG prices are so high.
So, it might be a stalemate, depending on how motivated a buyer is. The production for Scarborough is still a while away, so the LNG price and revenue may not be as strong in the future as they could be if the project were operating today.
Despite that, Woodside shares continue to generate strong cash flow and pay dividends thanks to high energy prices.
