By Clyde Russell

LAUNCESTON Australia (Reuters). Despite being approved by the Australian government for construction, a huge new liquefied LNG (LNG) facility has not been built in Australia. The Scarborough project’s market reality and structure suggest it might be the last.

Woodside Petroleum (OTC::) and BHP Group(NYSE:) backed Monday’s final approval of the $12 billion plan for the Scarborough gas field in Western Australia and the expansion of the Pluto LNG plant.

Woodside will also merge with BHP’s petroleum arm. BHP shareholders will be issued Woodside shares, and Woodside shareholders will end up owning approximately 48%.

Scarborough field is situated approximately 375 kilometers (233 mi) from the coast of Western Australia. It contains about 11.1 trillion cubic foot of dry gas.

Woodside anticipates producing approximately 8 million tonnes per year at its Pluto Liquifaction Plant’s second train. It is aiming for first cargo by 2026.

According to the company, the total cost for the LNG production is $5.80 per Million British Thermal Units (mmBtu). This is significantly higher than the $36.70 spot price and also much more than the $1.85 that super-chilled fuel dropped to last May during the peak of the coronavirus epidemic.

Scarborough’s and Pluto’s second trains are the first major LNG development to make a decision in Australia. They come after Australia invested around $200 billion in capacity increases to approximately 80 million tonnes. It is now the largest LNG exporter in the world.

Both Woodside and BHP seem to be happy at first glance.

This transforms Woodside to a global top-10 independent oil and natural gas company. It also allows BHP (the world’s largest listed miner) to exit an area it no longer considers core. BHP can then concentrate on the production of metals essential for the energy transition.

Woodside may face increased environmental resistance, particularly in light of the COP26 Climate Summit and increasing calls to stop new oil and gas, as well as coal-related projects.

Woodside claims Scarborough has “just 0.1% carbon dioxide” and Scarborough’s gas is processed using the expanded Pluto LNG facility. This supports our Asian customers’ decarbonisation goals.

This view is unlikely to be shared by environmental or climate groups, which are already preparing to oppose the development.

Woodside can process gas at Pluto LNG from an expanded range of fields if the State approves it without any environmental review. This is the case being brought by The Conservation Council of Western Australia.

FINANCING

Although there will be opposition visible and ongoing to Scarborough’s plans, there are still other concerns.

Woodside also agreed to sell 49% to Global Infrastructure Partners, a private equity group.

GIP is legally bound to provide financing under the terms of this agreement, however, Woodside bears virtually all risk in relation to possible cost overruns or regulatory hurdles as well as changes to emission liabilities.

GIP is a proven investor in large projects all over the world. However, GIP’s involvement in an Australian major LNG project broke with the traditional pattern of working in partnership with major Asian trading houses and utility customers.

Woodside is not benefiting from the GIP deal, which implies that Woodside couldn’t find takers with traditional partners.

It could indicate that LNG projects are becoming more difficult to finance, and that South Korea and Japan are already looking at ways to reduce their emissions by switching away from LNG.

Scarborough LNG is also expected to hit the market at the same time that major extensions from Russia and Qatar also arrive on the market. This could create an LNG overhang in a period when many major buyers will be transitioning to more renewable options.

Woodside basically bets that LNG in Asia’s energy mix will be around for a lot longer than expected if the goal of net zero emissions is achieved.