Investor Insight Investor Bulletin: Woodside diversifies into ammonia, but is it decarbonisation?

Woodside’s acquisition of an ammonia project in Texas, USA, is a welcome departure from deploying shareholder capital to long-duration, low-margin and high-emissions oil and gas projects. But this “new energy” investment won’t reduce Woodside’s oil and gas emissions.

9th August 2024

This week, Woodside Energy Group Ltd announced a US$2.35 billion deal to acquire an ammonia project in the US Gulf Coast from chemicals giant OCI Global. The post-FID project is targeting first ammonia, derived from gas, in 2025; and lower carbon ammonia, derived from gas paired with Carbon Capture and Storage (CCS), in 2026.

This is Woodside’s first investment in ammonia and first major investment in “new energy”, it is not a new strategy. It is consistent with Woodside’s existing “new energy” targets of US$5billion investment and 5MtCO2e p.a. emissions abatement. A “US Gulf Coast Opportunity” was flagged in Woodside’s 2023 Climate Transition Action Plan (CTAP)^[1], which the majority of investors rejected at the last AGM.

Using excess free cash flow to diversify into “new energy” projects is better than allocating capex to long-duration and uncompetitive fossil fuel projects, such as the US$900 million purchase of Driftwood LNG, which is more expensive than 76% of other pre-FID US LNG projects.^[2] “New energy” is also a good idea if it offers comparable or better risk-adjusted returns to alternatives like share buybacks or dividends. (Though, judging by the share price reaction on the day of the announcement, the jury is still out on if this is the case.)

But Woodside’s diversification into “new energy” doesn’t address the company’s primary problem – its non-competitive and high-emissions pre-FID oil and gas portfolio, and the threat this poses to longer-term shareholder value.

Woodside’s “new energy” portfolio is not designed to reduce Woodside’s emissions. Investing in an ammonia project forecast to abate 3.2 MtCO2e p.a., at the same time as investing in Driftwood, which could cause 68 MtCO2e p.a. of scope 3 emissions, reflects the imbalanced scales of Woodside’s strategy. This is a fundamental problem with Woodside’s existing climate transition plan.

Key points

The acquisition of the ammonia project from OCI is consistent with Woodside’s “new energy” strategy as articulated in its 2023 CTAP. As Woodside says, it is a “material step” towards delivering its “Scope 3 investment and abatement targets”^[3], with Phase 2 of the project having the capacity to meet over 60 percent of the abatement target. However, this should be viewed in the context of a majority of shareholders rejecting the CTAP.
Woodside’s “new energy” strategy and associated targets are not intended to decarbonise Woodside’s portfolio, since its “new energy” investments are additive, rather than substituting for oil and gas investments.
The most important role for the oil and gas sector in the energy transition is to reduce hydrocarbon investment rather than increase investment in clean energy. Between 2019 and 2023, the oil and gas sector provided US$75 billion of global clean energy funding, which is just 1% of total clean energy funding. In contrast, global fossil fuel investment over the same period was US$5.1 trillion.^[4]
What looks good about the OCI deal?
- Unlike oil and gas, ammonia could have a sustained role at scale in a low-carbon economy. The IEA suggests blue ammonia could make up around 20% of the global market by 2050 in its Net Zero Emissions scenario.^[5]
- Woodside estimates this project will exceed its 10% IRR investment hurdle for “new energy” when allowing for a US tax credit for CCS, and Woodside receiving a premium price for lower carbon ammonia sold to Europe.
- Woodside has moved its capex risk to an experienced ammonia company. This could be wise considering the lack of experience Woodside has in this field.
- The business model seems dependent on the CCS working, providing a strong incentive for ExxonMobil, Woodside and Linde to make sure the CCS works and is deployed on time.
What are the risks of the OCI deal?
- We see a range of technical risks to the project, principally around the reliance on CCS, which has a long and consistent history of underperforming pre-FID guidance. Any emissions abatement hinges on the successful deployment of CCS.
- Woodside has contractual arrangements with Linde to source some of the required hydrogen feedstock from 2025, whilst Linde has a contractual arrangement with ExxonMobil to sequester some of the associated CO2 emissions from the hydrogen production using CCS from 2026. However, ExxonMobil does not currently have regulatory approval for the CCS permits in question.
- It diminishes Woodside’s capacity to fund dividends and share buybacks.

Key stewardship considerations for investors

The OCI acquisition should not divert investors’ attention from the problems with Woodside’s current strategy of pursuing hydrocarbon growth which is neither Paris-aligned nor value-accretive. The key stewardship considerations should include questioning Woodside’s allocation of capital to:

pre-FID, long-duration, high-cost, high-emissions and low-value projects, specifically Browse, Sunrise, Calypso and Driftwood
oil and gas exploration, especially considering Woodside’s poor track record.
Unless these points are addressed, it is not possible for Woodside to produce a credible climate transition plan.
Questions investors may want to ask the company about the OCI acquisition include:
When compared with the other Paris-aligned alternative options (e.g. buybacks), does this project provide comparable risk-adjusted returns?
Will this project meet Woodside’s investment hurdles if the CCS is not delivered, or not delivered on time?

Download Investor Bulletin: Woodside diversifies into ammonia, but is it decarbonisation? | 09/08/24

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