The three-cornered stare-off between a local oil junior, Australia's regional gas champion and the world's largest independent exploration and development company has reached John Woo proportions.
The local is FAR Limited and it weighs in with a market capitalisation of $415 million. The regional champ is Woodside Energy, market cap $26 billion. And the oil elephant in their room is ConocoPhillips, which the US market values at a muscular $72 billion.
The cause of their increasingly public and commercial deadlock is the SNE oil discovery in Senegal that FAR originally identified, that Conoco helped discover and that
Woodside bought into rather cheaply last year when the American found itself in more need of quick cash than future production.
Last July, Woodside agreed to pay a total of $US430 million to Conoco for the US major's 35 per cent interest in three Senegalese offshore exploration leases that host two oil discoveries, one of which is rare because it is big.
Even then, Woodside was seen to be the winner of the deal, given it paid the equivalent of $US2.20 a barrel for its share of the SNE discovery's assessed reserves. That is lower than most companies spend to find oil and much lower than most are generally prepared to pay for them.
The deal is made to look better given the fact that the contingent resource at SNE was about 350 million barrels of oil when Woodside bought in. It is now put at 640 million and FAR management reckons the contingent resource is tracking to the 1 billion barrel mark.
So, effectively, Woodside's entry price has already been trimmed by about 40 per cent since Conoco flipped its place share of Senegal – and this for a field that has been widely assessed to be commercial at something less than a $US50-a-barrel oil price.
So where's the problem here?
Well, FAR is a 15 per cent owner of the SNE leases and it reckons the pre-emptive rights that arrive with its founding tenure continue to be ignored by Conoco and Woodside. Having assessed and attempted to begin the process of exercising those rights in July last year, FAR filed a notice of dispute over the deal with Conoco in August.
FAR maintains that Conoco pretty much ignored that notice and there are claims that the US independent refused to provide the valuation documentation that FAR assessed as being necessary to understanding whether exercise of its rights made commercial sense.
Whatever the accuracy of those claims, history tells us that Conoco got its cash in October and ever since Woodside has publicly asserted that it is the owner of 35 per cent of the Senegalese permits and has been contributing its proportional share of the joint venture's appraisal and exploration costs.
Ever since, FAR has consistently contested the standing of the deal and its completion, saying its commercial rights had been abused and the government of Senegal (which is a 10 per cent owner of the joint venture through the state oil company) had not approved the transaction.
But Woodside is apparently not yet convinced that even FAR believes is has a case.
"FAR has never issued a notice exercising any pre-emption rights they believed that they had," a Woodside spokesman said on Thursday.
"FAR has not filed a claim or notice of arbitration under the JOA or requested mediation to resolve any dispute. Since completion of the transaction on 28 October 2016, FAR has not taken any concrete steps to resolve its concerns and has not contacted either Woodside or ConocoPhillips regarding these matters."
Interestingly enough, the operator of the Senegal joint venture is UK independent Cairn Energy. Like Conoco, it was invited to the project by FAR in 2013 and it has driven an unusually successful exploration campaign.
In a March profit briefing Cairn chief executive Simon Thomson was pushed for a view on the Woodside-FAR situation.
"From our perspective there is no issue," Thomson said. "Woodside are a partner. We're working extremely well with them. We think they're a great value-adding partner. As I say, we've established a good relationship. One of our partners has a dispute with an outgoing partner, and I'm not sure where that's got to, but from our perspective and from the government's perspective Woodside are adding value, and they're moving forward and there are no delays as a result of that."
Cairn's welcome of Woodside is important for a reason other than FAR's determination to leverage rights that both Conoco and Woodside insist have either been extinguished or didn't exist in the first place.
At a point in the SNE's progress from discovery to development, the operation of the field was supposed to swap from Cairn to Conoco under the terms of the 2013 joint operating agreement. Woodside and Cairn have now made plain that they are operating on the clear understanding that the Australian has inherited the rights promised to Conoco and that management and operation of the development will shift to Woodside.
It is understood that Woodside approached FAR about 10 days ago to affirm this progress. Statements issued to the ASX on Thursday first by Woodside and then, some hours later by FAR, make it plain that the plucky Aussie explorer is not about to sit back and let that happen without contest.
Thursday opened with Woodside announcing that FAR had refused to support its move to "development lead", which the Western Australian then announced as an "important step in the transition to assuming operatorship".
"These actions by FAR put at risk the timely development of the SNE oil field in a prospective emerging basin," Woodside chief executive Peter Coleman said in the statement. While the design of the SNE development remains a subject of review, both Cairn and Woodside have promoted 2021.
FAR dismisses that claim, noting that joint venture progress can be as soundly managed by Cairn as by Woodside for the time being.
FAR indicated there was a vast difference between simply stating you are taking over and being able to. FAR asserted that there was no joint venture agreement to enable the transfer of authority that Woodside asserted was in train. It said the joint venture had not been notified of the proposed transfer let alone received confirmation that the shift had been endorsed by the government.
"FAR's position in relation to its valuable pre-emptive rights over the sale of ConocoPhillips' interest in the joint venture is well documented and remains unresolved," the company responded.
"FAR continues to be open to finding an amicable solution with ConocoPhillips. FAR continues to reserve its rights in relation to the dispute, including resolution through international arbitration as provided for in the joint operating agreement."
Just 11 days ago at the FAR annual meeting, shareholders were told that arbitration might cost the company about $1 million, that it would be heard in France under Senegalese law and that the process might take at least 12 months.
It might well be that Woodside does not have this time to waste. For all of its steady success, Woodside is a business with short-term growth challenges and SNE already sits on the list of the developments that will fill this gap.
We have seen estimates that a successful defence of its claim to pre-emptive rights could be worth about $500 million for FAR. And there would appear to be several ways for FAR to skin that value cat here.
If, for example, a court were eventually to find that it did, indeed, own rights over Woodside's 35 per cent, FAR could complete that deal by simply exercising its call and then on-selling all or part of the interest at a price that reflects the upgraded resource.
Alternatively, if FAR could create enough tension and trouble, it might well encourage Woodside into making an offer for its 15 per cent on terms that reflect the new known knowns of the SNE resource and that are commercially justified by the size of the bargain that it got from Conoco.
It is understood that Coleman and FAR boss Cath Norman chatted recently about ambitions and realistic options. Coleman is said to have pushed Norman on exactly what FAR wanted to achieve. Norman said she was charged with defending and enhancing the value of FAR for shareholders. She then called on Coleman to come back with options while accepting the Woodside man's request that FAR would give him some level of notice should it make a move to arbitration.
Whether that promise holds, given Coleman's decision to move to DefCon Three, well, time will tell.
