We missed an important clarification about Woodside Petroleum’s US$45 billion deal with PetroChina. The company said the Chinese will pay the going market rate for the LNG under the 20-year deal. That’s not a trivial detail. Here’s why…
In 2002, when Woodside signed an AU$25 billion deal with the China National Offshore Oil Company (CNOOC) for gas from the North West Shelf, the terms of the deal did not allow the North West Shelf partners to charge a market price for gas.
In 2002, West Texas Intermediate crude oil traded for as little as US$18.02 a barrel. That’s not a typo. Oil has gone up 325% and US$58 since Woodside made its first big deal with China. This structrual repricing of oil for the world economy—partly geopolitical and partly geological, reflecting a producion peak of cheap oil at around 85 million barrels per day —hadn’t taken place when Woodside made its first China deal.
Its first big energy deal didn’t allow Woodside to profit from rising LNG prices. No one expected oil to go up 325% and LNG to rise with it. Now that the price of energy is much higher (thanks in no small part to Chinese demand) Woodside stands to profit more from future deals with China. Why?
Thinking back on the generous terms of their 2002 deal, Chinese energy firms have been reluctant to accept market pricing in their long-term deals with Woodside. That changed last week. China will pay market prices for Woodside’s gas going forward.
By the way, we spoke with a spokesperson from Woodside last week regarding the pricing arrangements on long-term deals. We were curious how much information Woodside is obliged to disclose. Is the price for LNG which it charges to long-term customers some kind of annual average? Is it re-set once a year? Once a month?
The company declined to comment, although in a prompt and cheerful manner. And when we asked if it was safe to conclude that Woodside would not be a party to deals that locked it out of future LNG price rises, the spokesperson said, “It would be safe to conclude that”. That’s good news for Woodside’s shareholders.
Let’s connect the dots again in the gold and currency market. Gold rallied last week on the market expectation that the Fed would soon weaken the US dollar by lowering short-term interest rates. Gold, which has no yield at all, is starting to be seen by more and more investors as a refuge from the wealth-destroying policies of central bankers.
Markets and Money