Climate litigation could thwart Woodside-Santos merger

A possible deal is afoot in Australia that would impact not only LNG markets in the Asia-Pacific region, but globally as well. However, climate litigation could pose the most crucial test for the ambitious merger.

In December, news broke that Woodside Energy and Santos Ltd., two of Australia’s most-storied and largest LNG players, were in merger talks that would create a AUD$52 billion (US$80 billion) gas powerhouse.

Though both companies said talks were in early stages, a combination of the two firms would nearly consolidate Australia’s LNG sector. Given the size of the sector, that’s no mean feat.

In 2021-2022, gas in Australia generated AUD$121.17 billion in economic activity, making up 5.25 percent of the country’s GDP and supporting nearly 100,000 jobs in a country with only 26 million people. Meanwhile, the market size of the LNG industry in Australia between 2018 and 2023 averaged some AUD$90.3 billion, according to an IBISWorld report. 

Meanwhile, Aussie exports of the super-cooled fuel make up just over 20 percent of global LNG exports. Australia passed legacy LNG exporter Qatar in 2021 to take the top LNG exporter slot. Since then it’s been a horse race between the two.

Aussie LNG export volumes hit 81.3 million tonnes in 2022, for a 20.1 percent market share. Qatar trailed second with 79.9 million tonnes, while the U.S. was third with 79.4 million tonnes.

However, in 2023 the U.S. eclipsed both Australia and Qatar to take the top exporter slot at 91.32 million tonnes for the year, according to Bloomberg data. Australia ranked second with volumes little changed from 2022.

Several take-aways

There are a number of take-aways from a possible Woodside-Santos merger, including how a tie-up of this size would be able to pass regulatory approval.

Todd Warren, head of research at Sydney-based Tribeca Investment Partners told auzbiz that the deal “spurs competitive concerns, but if it went through, it would create a very globally significant oil and gas producer.”

A combined Woodside-Santos company would put them inside the top ten, close to the top five global oil and gas producers. But certainly outside the ranks of the supermajors, he explained.

For regulators to approve the deal, Warren said there would have to be an asset sell-down from both companies. This would help placate competition concerns, especially from smaller domestic gas players.

A combined Woodside-Santos entity would also become a force in the LNG industry in Asia and even globally. Around three quarters of Australia’s LNG exports are shipped to just four Asian buyers: China, Japan, South Korea and India.

However, these represent the top four global LNG importers. Most of these volumes are obligated under long-term contracts. Australia has no LNG contracts with European countries.

A combined Woodside-Santos company would rank only behind QatarEnergy, Cheniere Energy, Shell, Exxon Mobil and Chevron, based on 2023 production levels. It would become the world’s sixth largest LNG producer, bypassing France’s TotalEnergies and Malaysian state-run gas giant Petronas, with output over 16 mtpa.

The new entity would also be able to “challenge the oil majors through multiple LNG export hubs,” Bernstein analyst Neil Beveridge told Reuters.

Talks between the two Aussie energy giants came just weeks after U.S. supermajor ExxonMobil agreed to buy Pioneer Natural Resources for US$64 billion, including debt. In October, U.S. supermajor Chevron reached a US$60 billion takeover of Hess Corp. The takeovers come as the largest companies seek to deploy huge profits made during the energy crisis to buy up prospects in the oil market, a Financial Times report said.

Climate litigation hurdles

Australia is already the most climate litigious country in the world, with much of that activity directed at the country’s massive natural resources and LNG sectors, according to an Australian Financial Review report. The country now averages over 100 climate change litigation cases per year with forecasts for that number to increase.

This has already either slowed or entirely thwarted individual efforts by Woodside and Santos over new gas development.

On Dec. 14th, one week after the possible merger was announced, Greenpeace Australia Pacific filed a lawsuit against Woodside in the Australian Federal Court. The case could see Woodside held accountable for misleading and/or deceiving the Australian public about the enormous climate harm of its gas and oil projects.

In November, the Federal Court ruled that Santos could not drill eight wells in its AUD$3.6 billion Barossa gas field off northern Australia. The Court reached its decision after it was found that the company failed to consult local Indigenous people adequately on the development. Santos has vowed to appeal the ruling.

Just two months earlier, the Federal Court halted approval for Woodside to conduct seismic blasting under the seabed for its AUD$12 billion Scarborough gas project after a legal challenge by an Indigenous woman. Woodside also vowed to appeal the ruling.

This litigious environment would also pose a major hurdle for the Woodside-Santos merger, John Morris, a Perth-based energy consultant, told Gas Outlook.

“Both companies are facing mounting pressure from Aboriginal groups who are protesting damage to onshore and now underwater archaeological sites. The latter is likely to be a mounting problem with new federal laws recently introduced that require proponents of underwater developments to complete archaeological surveys prior to any work,” he said.

“This will be a major headache for oil companies because there is a shortage of trained underwater experts to do the work and most of the human record in Australia is now underwater so they are likely to find a lot of sites if they start looking.”

“Existing projects will probably proceed, but it’s unlikely that any new projects beyond those currently under development will ever happen given the amount of opposition,” he added.

Lumping both companies together would put all of these issues in one bucket which may make it easier for activists to target them, he explained. On the other hand, LNG is Australia’s second biggest export and a major employer and both companies have “very strong political influence and both State and Federal governments have their backs.”