Editorial: Right assets in the right hands [NGW Magazine]
The planks of Total’s platform for growth continue to fall neatly into place: Chevron, deciding a bird in the hand was worth at least two in the bush, has walked away from Anadarko, pocketing the carefully-planned $1bn break fee. In turn, Occidental can buy it and sell on to Total the unwanted part of Anadarko – its African oil and gas business – en passant.
That gives Total a big boost for its integrated gas and power business, launched only at the start of the year as a separate segment.
This was never something that the French major could have planned long advance, given the apparent opportunism of its bid; and it shows the importance of making your own luck. A ripe plum has fallen into its hands, not envisaged a few months ago to judge from the rapid way in which the events unfolded.
This was a very different deal in its nature from the purchase of Engie’s LNG and selected upstream assets a few years ago, which almost seemed a state-directed retention of value. Engie, in common with E.ON and Centrica, is more interested in customers than upstream, and now most interested in zero carbon.
The US major by contrast can now buy back more shares, pleasing investors; and also demonstrating capital discipline in an uncertain investment environment, as trade wars loom.
It probably expects to be able to find better-value, North American oil and gas assets for sale elsewhere if it needs to grow. The LNG in Mozambique would have been nice to have, given its Angolan and Australian portfolio; but it was not an essential part of the deal.
Chevron’s decision to walk might worry Occidental’s shareholders, who will now be asking if they are over-paying, especially with the additional burden of the stiff Buffett repayment terms; but the Total side-deal to buy all the African assets for just under €9bn will come as relief. They will not now have to worry about an entry into what would for them be a new and highly risky business: LNG. They can focus on North American tight oil, which they do understand, and for which demand can only go one way – which is not the case with LNG, as this year has shown.
The US secretary of state for energy, Rick Perry, might have been putting a brave face on it, but the celebrated arrival of so much US LNG in Europe this year just shows how low prices have sunk in Asia. And yet at the same time, companies like Shell, still using Brent-crude based price indices, have been able to profit heavily from LNG trade, owing to time lags. But fingers can be burnt.
Total however does know the business and is buying a project that is FID-ready, in the shape of the Mozambique LNG enterprise. Indeed the decision is to be taken in the middle of next month, giving the rival ExxonMobil-Eni Rovuma LNG project fair notice of its intentions. Total will take Anadarko’s 26.5% participating interest and operatorship in Area 1, with the 12.8mn metric tons/yr LNG project.
It has more than 60 trillion ft³ of gas resources, of which less than a third – 18 trillion ft³ – will be developed with the first two-train project. About 9.5mn mt/yr of output has been sold on term contracts, leaving Total free to take on responsibility for the remainder or find buyers. It will give it more of a global reach as well, with east African production as well as west African from Nigeria.
Financing remains an issue: there are some questions over Mozambique sovereign risk and the higher associated cost for that, as well as for the nearby Rovuma LNG project. But Anadarko said May 8 that: “With commitments for financing in place, off-take secured, and all other issues under negotiation successfully addressed, we are excited to take the next step with the expected announcement of a final investment decision for the Mozambique LNG project on June 18.”
Total also picks up exploration licences offshore South Africa, near its recent Brulpadda gas discovery; and producing assets in Algeria and Ghana. Of the 102,000 net boe/d sales in Q4 2018, 66,000 boe/d were in Algeria. Anadarko says its portfolio in those two countries “continues to provide stable, high- margin, and Brent-levered oil production that generates significant free cash flow.”
Overall, the assets represent around 1.2bn barrels of oil equivalent of 2P reserves, of which 70% is gas; as well as 2bn boe of long-term natural gas resources in Mozambique. This further weights the French major’s hydrocarbons business towards gas, which is in keeping with the mood of the times: the drive towards decarbonisation makes gas relatively more attractive. Something after all will have to be used for dependable electricity generation but methane is also a good source of hydrogen.
A far more predictable merger was that between Wintershall and DEA. It follows very closely the model of the Centrica-Bayernwerk creation of Spirit, another roughly two-thirds, one third gas-focused production joint venture in the North Sea. Given the UK utility’s poor share price, as well as its strategic objective to become customer-focused, it might be looking to raise money sooner rather than later.
With aligned interests in gas, but with political friction given Russia’s LetterOne roots, the merger brings DEA’s ownership fully back inside Germany, creating a Russia and North Sea – focused producer but with assets sprinkled across north Africa and the Americas too. That too will be ripe for takeover and the first tranche of shares should be available in a year’s time.