Takeover activity, which has been a recent highlight of the U.S. petroleum industry, could spill over into other markets with speculation resurfacing that Australia’s top two oil and gas companies, Woodside and Santos, might merge.
A deal, once unthinkable under competition law, has become more likely as both companies struggle to grow, weighed down by a seemingly endless round of environmental objections to project development plans.
Woodside’s $11 billion Scarborough gas project has been delayed by protests about seismic testing at its Scarborough project while the $4 billion Barossa gas project of Santos has faced similar delays.
In both cases, the objections are from Aboriginal groups backed by environmentalists, to work taking place offshore with Australian courts accepting a common claim of insufficient consultation.
Woodside has been able to make some progress with work. The Australian Government’s offshore oil industry regulator last week granted approval for seismic work to start.
Santos is hoping to restart work on the Barossa project once it completes a fresh round of consultations with traditional landowners.
But while development plans edge forward delays at Scarborough and Barossa have attracted an international following, especially in Japan which is a major buyer of Australian liquefied natural gas (LNG).
Alarm in Tokyo that Australia could become an unreliable supplier of LNG has prompted concerned comments including a warning earlier this year from a former chairman of Tokyo Gas, Michiaki Hirose, that a problem with Australian gas supply would have a huge impact on people’s lives in Tokyo.
That remark helped focus the Australian Government’s attention on the potential crisis brewing in the oil and gas industry which is already facing stringent controls over its carbon emissions.
Pressure to simplify the Australian oil and gas sector has already seen two major mergers with Santos acquiring Oil Search, a business heavily exposed to LNG production in Papua New Guinea, and Woodside merging with the petroleum division of BHP Group.
Those deals have not stopped demand for more merger and acquisition activity, starting with a proposal from a fund manager, L1 Capital, that Santos split into an Asia-focused LNG business from its domestic oil and gas operations.
A similar objective of creating a bigger LNG business and a separate domestic operation could be achieved by Woodside and Santos merging.
Market speculation about the two companies merging first surfaced in 2010 but was dismissed at the time. A possible deal is again attracting investor attention because both Woodside and Santos are trading well below values assigned to U.S. oil companies.
Multiple factors have rekindled rumours of a Woodside deal with Santos, including global oil sector consolidation led by Exxon Mobil’s merger with Pioneer Natural Resources and Chevron’s acquisition of Hess Corporation.
Depressed share prices could also be a factor in Woodside and Santos looking for ways to create value through cost savings and improved funding options for delayed development projects.
Over the past six months Woodside shares have fallen by 14.5% while Santos has dropped by 9.4% despite the oil price today trading $73 a barrel, $3/bbl more than it was in mid-June.
The common thread dragging both companies down is their failure to overcome project development delays or convince the Australian Government to be more supportive.