Good morning, and thank you for joining us today for this Investor Briefing Day 2020 webcast from My Yalagonga, Woodside's headquarters here in Perth. I'm Damien Gair, Woodside's Vice President, Investor Relations. I'd like to begin by acknowledging the traditional owners and custodians of the land upon which we meet today, the Whadjuk people of the Noongar Nation, and pay my respects to the Elders, both past and present. I also extend my respect to all other Aboriginal and Torres Strait Islander peoples, their future generations, and acknowledge their continued connection to country. This year, we've all had to adjust the way we live and work, and demonstrate new ways of doing things.
And of course, this has included how we engage and communicate with our shareholders and other stakeholders. And against this backdrop, it is our pleasure to be meeting with you today entirely virtually. Our Investor Briefing Day is an incredibly important part of Woodside's corporate calendar, and we've been committed to going ahead in whatever form possible. Today's program will be led by our Managing Director and CEO, Peter Coleman, live here from Perth, with presentations from Doctor. Tom Ritzel Smith, Meg O'Neill, Fiona Hick, Sean Gregory and Sherry Dewey.
These presentations have been recorded in recent days, and Peter and all the presenters are here for live Q and A after the completion of the presentations. We're keen for today to be as interactive as possible in the circumstances. If you have a question, please type it in at any time into the question space, which is accessed by the blue icon at the top right hand side of the webcast player you're watching now. I'll put the questions to Peter and the team during the course of the Q and A. Also, some analysts will be joining us by moderated teleconference and will ask questions live in much the same way as a standard results conference call.
After the presentations, we've scheduled a short break for you to stretch your legs before commencing the live Q and A session led by Peter. And an archived version of the webcast will be available on our website if you would like to review the webcast in the future. Now before I hand over to Peter for his introduction and overview, there are 3 important points I'd like to mention. 1st, may I please draw your attention to the disclaimer, risk and assumptions in the presentation pack, which applies to the information we are discussing today. Secondly, today is Remembrance Day, We expect to be undertaking the Q and A session at 11 am Perth time.
We'll be pausing for a minute's silence at 11 am to remember those who died or suffered for Australia's cause in all wars and armed conflicts. And we'll resume the Q and A session after this short pause. And finally, this week marks NAIDOC Week around Australia, a time to celebrate the history, culture and achievements of Aboriginal and Torres Strait Islander Peoples. Woodside is an enthusiastic participant in the Australian Reconciliation journey. And at the end of today's program, we'd like to show you a brief video on this year's theme for NAIDOC Week, which is Always Was, Always Will Be.
I'd like to now hand over to Peter Coleman to get today underway.
Thank you, Damien, and welcome everybody to Woodside's 2020 Investor Briefing Day. My name is Peter Coleman. I'm the CEO and Managing Director of Woodside. Let me kick off with an overview for our session here today. And really, it's a day that we're going to talk about a number of things, but we're going to make the case for hydrocarbons.
We're going to make the case for LNG in particular, as we the world navigates through this climate change challenge that we have. And for Woodside, we see it as a wonderful opportunity to participate and make a significant difference, in some of the climate change challenges and opportunities that we see out over the coming years and decades. So let's talk about where we are today, how we've navigated the last few months, and let's then talk about what the future looks like for us. Now Woodside, of course, we're focused on delivering value in really what has been unprecedented times. We've got strong foundations for the company.
It's an excellent company and we've got world class assets and world class people. This year we'll deliver record production. So in the face of tropical cyclone Damien at the beginning of this year, the largest tropical cyclone that has ever hit our facilities in Karata. In the face of COVID and the uncertainties surrounding that, the Woodside's team is still focused on delivering a production record, a production record that's consistent with the guidance that we've given the market over the last 2 to 3 years. Along with that, we've been preparing for our major investment decisions, and the largest one of those is Scarborough.
You'll hear more about that in the presentations today. And we've maintained a strong balance sheet. We came into the beginning of the year ready for significant investments. We were confronted with some challenges, serious challenges around COVID. We've responded to that.
We've reduced our cost base by 50%. We've reduced our investments this year by some 60%, and we maintain a strong balance sheet through all of that and excellent liquidity. Sherry Dewey will talk to you about that later on this morning. Like everybody, we had to respond to the existential issues that we were confronted with this year. I've mentioned the energy demand destruction that was particularly acute in the Q2 of this year.
You saw that in our first half results. But on top of that, there was price volatility in the marketplace, particularly with respect to crude oil. And the issues that OPEC plus 1 or OPEC plus Russia had again in the Q2 of this year around what's how much supply should go into the marketplace. Fortunately, that's now all working its way through. OPEC has become disciplined.
Again, they've got agreement, on what their forward supply looks like and we're seeing demand come back into the market in very positive ways, particularly in Asia. The impact of the pandemic though went beyond simply demand and supply. It impacted our supply chains and it impacted our people. Our supply chains come from all over the world. Many of the many of our products that we need in our business come from the most affected parts of the globe with respect to the COVID pandemic.
We've managed our way through that without disruption. Equally, our people have also been flexible in their working arrangements and the controls that we've had to put in place to ensure that COVID did not get into our business and we want to thank them for that. Particularly pleasing is the fact that not one Woodside employee has been diagnosed with COVID through this period. So that's a testament to the controls we've had in place and the work that people have done. At Woodside, we're all about protecting value, the value for our shareholders, And setting aside those existential things that we don't always control, but what we do control is how we respond to them.
And one of those responses is to work on the things that we have in hand, the things that we have control of. And I'm very pleased to report that this year, on a year to date basis, we have the very best reliability we've ever had in our operations. So on top of record production, we now have record reliability and fingers crossed, year to date we also have our best safety record ever. So on the things that we can control, we're doing exceptionally well. We've also then looked to the future.
Whilst we're having to deal with the day to day issues around our production operations, we've also been looking to the future and taking an opportunity to see how we can increase the value of our projects coming through. And we've done that through increasing capacity at Scarborough and also de risking some of the execution. Meg O'Neill will speak more to that later on. We've also worked on ensuring that we've got all of the commercial arrangements and all of the approvals in place to be FID ready by the second half of next year. Along with that, and we often forget, we went to an FID on our Sangamo project in Senegal in January of this year.
That project is on schedule, and we're very, very pleased that we'll see production from that sometime in 2023. Now let's talk about the case for a hydrocarbon business. We're all about developing a robust and resilient hydrocarbon business for the years decades ahead as we navigate our way through our climate change commitments. And let's be clear, Woodside is committed to the Paris Accord and the climate change commitments in Paris. So for us, our view is, and it's a very strong view, and Doctor.
Tom Ritzel Smith will speak to this later, is that LNG is a fundamental element of decarbonizing the world. And the advantage that Woodside has, of course, is LNG goes into the major markets in which we are already very, very competitive. To be in the LNG business, you must be cost competitive. It's becoming more and more commoditized, and those who will have the best margins are those who will outperform the marketplace. Sherry Dewey will show you more of that later on as she shows you the margins that we're getting out of our business.
To get those margins you must have world class assets. This is a business that is about scale. This is a business where being bigger brings synergies that you simply don't get from small operations. And Woodside clearly operates world class facilities already, and the projects that we have in front of us are world class as well. So we're all about scale and all about getting margins back into our business.
Along with that though goes prudent capital management, and we've promised our shareholders year after year that we will be prudent in the way that we manage our capital and we've done that this year, as I mentioned previously, in cutting back on our capital spend by over 60%. And we could have cut further if we needed to, but we kept things going where we thought that was prudent. Our balance sheet is in good shape, it's very robust, our gearing is relatively low, our ratios are all where they need to be. We're continuing to demonstrate prudent capital management. And then finally, with all of these other things happening around the world, with our competitors starting to look at how they manage the climate change transition, with other companies stretched on their balance sheet and not having the capital to deploy that they need to.
We have inorganic opportunities in front of us that just simply didn't exist 12 months ago. And I can assure you that the Woodside team is scouring the world, looking at each one of those opportunities to identify those that really truly add value to Woodside shareholders. And then finally, before I leave this page, I'm really going to focus on the right hand side. Today, you're going to hear a lot about Scarborough, and you're going to hear a lot about Scarborough for a good reason. We are continuing to target FID in the second half of 2021 for Scarborough and Pluto Train 2.
This is an extremely important project to Woodside, it's an extremely important project to industry and it's one that I know Woodside shareholders are going to be proud of in the years to come. Let's talk about the energy transition for a moment. It's very important that we understand what the pathway is that Woodside is pursuing. The first part of that energy transition is really making sure that we have a resilient hydrocarbon business. We're proud of what we do.
What we do is good for the world, it's providing affordable clean energy for the world, and we'll show you later how that's going to that demand is going to continue to grow. So we're about making sure that the existing business we have and the new hydrocarbon businesses we have, which are centred on LNG, are going to be resilient. We know as part of that though, we need to do 2 things. The first thing we need to do is to develop large scale carbon offsets, and we've been doing that for many years already, in fact since 2,008, and we've just grown that activity, in the past year with a new relationship, that we're developing with Greening Australia. We also know that part of that equation is going to be carbon capture and storage, and we'll show you during the presentations today that we have significant carbon capture and storage opportunities in our existing basins, in the Exmouth Basin, in the Carnarvon Basin, and in the Browse Basin, where our assets are located.
So those three things go together in ensuring that we have a resilient LNG based hydrocarbon business, and one that is set up to meet our climate change commitments. The 4th step then is simply looking at where can we compete if new products come into the energy market? What are those new products? Are they renewables? Are they wind?
Is it hydrogen? For Woodside, we believe our pathway is a hydrogen future, and we'll talk we'll show you today what we think that hydrogen pathway looks like, and more importantly, what the opportunity is and why Woodside should be a player in that in the future. Finally, none of this happens without people. And with all of these other things happening this year, we've maintained our focus on a value creating culture within Woodside and continuing to develop our people. We've refreshed our leadership team.
We've recently had 3 appointments to the Executive Committee that are internal promotions, and we're very pleased with that because it's a testament to the quality of the people we have and the quality of the leadership programs within Woodside. We are without peer with respect to our diversity and inclusivity, within our company. And as shareholders and employees, we should all be very, very proud of that. It makes good business sense, it makes for a resilient company into the future, and it's extremely important for the employee value proposition that we put to our employees. And then finally, we've got an engaged workforce.
They are our ambassadors. They are the one that create value for us. They're the ones that go out and deal with the communities each and every day. They're the ones that deal with government and very importantly, they're the ones that come to work every day looking for ways to create value for Woodside shareholders. So with that, we will move this morning then to some of the presentations.
The first one we've got coming is on climate. It's from Doctor. Tom Ritzel Smith. Tom is a new appointment to the Executive Committee, and I think you're going to enjoy Tom's presentation.
It's a pleasure to be speaking to you about Woodside's climate strategy. Let's start from a global perspective. Affordable energy and economic development have gone hand in hand for 100 years. Looking forward to 2,030, we see 2 stories, growing demand for energy in developing economies to support an increasing and more prosperous population, particularly in Asia Pacific, where the middle class is expected to grow by 1,500,000,000 people and flat energy demand in wealthy developed economies where population is forecast to remain stable. There are many factors that will impact how this future energy demand will be met.
The 2016 Paris Agreement, which sets the goal to limit temperature increase to well below 2 degrees Celsius in order to avoid the most significant impacts of climate change recognizes this uncertainty. Paris requires the global economy to achieve net zero emissions by the second half of the century, but it allows individual countries to set their own policies to achieve this target, recognizing their very different political and economic considerations. Disruptions of 2020 associated with the global pandemic have added further variability to potential energy pathways. So Woodside continues to consider a wide range of credible policy driven scenarios for future energy demand. For example, the International Energy Agency, or IEA, issues 3 leading scenarios.
The stated policy scenario extrapolates current policy commitments, which do not at this stage meet the Paris goals. Whilst the sustainable development and net zero scenarios meet Paris goals, but will require significant widespread and rapid changes in policy and in energy investment. Crucially, though, in all of these scenarios, there is significant demand for new investment in gas supply to meet global energy demand in 2,030. Let's look more closely at the role gas plays here. Gas is expected to be resilient partly because it is used in a very broad range of applications beyond just power, including the industrial, transport and building sectors, which are hard to electrify and therefore where renewables have limited application.
Countries in developing and emerging Asia Pacific have strongly growing energy demand and low gas use currently and are looking to gas as a clean and affordable option to expand their economies and to displace other more polluting fossil fuels such as coal, oil and biomass. Air quality is a major driver of energy policy in countries like China and India, where the health impacts of emissions from coal, oil and biomass are significant and impact the lives of 1,000,000. The incredible scenes of blue skies and distant mountain vistas in China and India during the COVID lockdown showed that lowering air pollution by reducing coal and oil use can rapidly make a difference. You can see the impact of these factors reflected in the graph on the right that shows gas demand growing strongly in Asia Pacific out to 2,040, even in the IEA's Paris compliant sustainable development scenario. Within the global gas market, LNG demand is expected to grow significantly over the next 2 decades.
And meeting this demand will require new investment as the existing fields decline. This growth in LNG is driven by customer preference for low cost, flexible and clean energy, together with the other advantages of gas highlighted in the previous slide. Unlike pipeline gas, customers can secure LNG from diverse suppliers and can rapidly acquire additional gas to manage seasonal or unexpected demand such as after Japan's Fukushima disaster. To remain competitive as a clean fuel in the long term, value chain. Key to this is that each operator in the value chain manages their direct or Scope 1 emissions.
Woodside is already managing our direct emissions well within the upstream part of the value chain under our control. Our methane emissions are below 0.1% by volume in our LNG facilities, and we are reducing our overall emissions on the path to our target of net 0 by 2,050, which I will talk about shortly. Woodside's major customers are already taking action to address emissions in their part of the LNG value chain or what we report as our Scope 3 emissions. In fact, Tokyo Gas and Jira have set net 0 2,050 goals in support of their own country's Paris policies. They see LNG, together with energy efficiency and carbon capture and storage, as key to delivering these goals.
We are supporting industry efforts to reduce emissions across the LNG value chain, for example, by sharing our deep expertise in managing methane emissions through the methane guiding principles and through our technology partnership with Jira to supply low carbon ammonia for power generation. We expect low carbon hydrogen to be an important and rapidly growing use of our gas in the future. And later today, Sean will talk about how Woodside is well positioned to take advantage of this opportunity. LNG's important role in supporting decarbonization means that many suppliers see increasing LNG in their portfolio as key to their own decarbonization strategies. Woodside, however, does not need to transition our portfolio to LNG as we are already an LNG company.
So let's now look at Woodside's targets for decarbonizing our production. Today, we announced clear near and midterm emissions reduction targets on our pathway towards our target of net zero direct emissions by 2,050. This builds on our existing emissions reduction programs, including our commitment to offset Pluto's reservoir CO2 and our 2016 to 2020 5 percent energy efficiency target. Our new near term target is a 15% reduction in net equity scope 1 and 2 emissions by 2025, compared with the average emissions over the period 2016 to 2020. This will be delivered primarily by offsetting all global equity reservoir CO2 from 2021, supported by a new 2021 to 2025 energy efficiency target.
The new midterm target is a 30% a 30% reduction in net equity scope 1 and 2 emissions by 2,030. Woodside aims to achieve the 30% reduction target through a range of We will limit emissions through efficient operations. We will limit emissions through efficient operations. And finally, we will use high quality offsets. By managing our decarbonization strategy on a corporate portfolio level, we can achieve lower abatement costs and we have already included this spend other operators through divestments.
We are well on the way. In the decade to 2020, we've cut over 2,700,000 tonnes of net greenhouse emissions through engineering design, operational efficiency and offsetting. Designing out emissions is always our first preference. In many cases, it not only reduces emissions, but also cuts costs and increases production of saleable gas. For example, the world first deployment of battery storage at the Gudrun A platform in 2019 resulted in savings of over 3,000 tonnes of fuel gas and 7,000 tonnes of CO2 emissions per year.
We also continue to drive down emissions through better operating processes. For example, the installation of automated process control at Pluto LNG in 2014 improved process stability and reduced flaring by 10,000 tonnes of CO2 equivalent per year. Quality offsets supported by good policy and rigorous science will be a key component of our approach, In particular, nature based carbon removal projects such as native ecosystem restoration are critical for the world to achieve rapid decarbonization at scale and can also deliver co benefits related to other sustainable development goals. A recent paper in the journal Nature described the restoration of native ecosystems as central to stabilizing the climate and conserving biodiversity. It showed they have the potential to avoid 60% of expected extinctions and sequester nearly 300 gigatons of CO2, which is around 30% of the total CO2 increase in the atmosphere since the Industrial Revolution.
To summarize, our customers are looking to LNG in the future to provide affordable clean energy. Woodside has a leading LNG portfolio mix, which positions us well, and we have established clear decarbonization targets to ensure we remain competitive in a low carbon economy. Finally, before I hand over to Meg, the following short video explains a bit more about the work of our dedicated Carbon Offsets team.
When we talk about achieving net 0, we mean what the Paris Agreement calls a balance between emissions and removal of greenhouse gases. Woodside is focused both on emissions reduction on one side of that balance and directly removing carbon dioxide from the atmosphere on the other side. It is not a choice, we need to do both. To this end, we have established a business to originate and acquire carbon offsets. Right now, the planting of trees and reforestation is one of the most effective, relatively low cost and reliable offset methods for removing carbon dioxide from the atmosphere while bringing benefits to rural communities and
past as well as residual emissions from sectors where emissions cannot be brought to 0 such as agriculture or that cannot be reduced fast enough in hard to abate sectors. Ultimately, the world needs to go beyond net 0 to limit temperature increase to 1.5 degrees.
Woodside
a carbon business which is focused exclusively on generating and acquiring quality offsets. Our approach is centered on ensuring our offsets are scientifically a marketing exercise. We are operating and planning at a much bigger scale than that, which means we are applying the usual business acumen that our investors expect to make sure we are adding value and contributing to Woodside's overall competitiveness. To do this, we are creating a portfolio of offsets, some in Australia, others internationally, some created by our carbon projects and some acquired from others, but all of them robust, scientifically verified and cost competitive. Offsets aren't just about reducing our own direct emissions, although that is where we start today.
Because of the scale of the opportunity, we think they could become a business in their own right, both to neutralize emissions in hard to abate sectors, and eventually to help the world go beyond net 0 and reduce greenhouse concentration levels again. I'm really excited about the potential for this in the future, and for the economic and other ecosystem benefits it will bring.
I'm pleased we were able to maintain this opportunity to update you on Woodside's activities and plans. Hopefully, next year, we can do this in person. Today, I'll be focusing on the Scarborough and Pluto Train 2 developments and the value they will provide to Woodside shareholders, as we head towards targeted FID in the second half of twenty twenty one. I'll also provide an update on the the progress of our Sangomar development, and some further information on Browse. Let's kick off with Scarborough and Pluto Train 2, and the significant value we expect to deliver through this development.
We say this for a number of reasons. 1st, the quality of the offshore resource. Noting that it was at last year's investor briefing day that we discussed the 52% increase in the estimated resource size. Secondly, the efficient development concept, which makes use of the existing infrastructure already in place at Pluto LNG. And third, since deferring FID in March this year, we've been busy looking at how we will extract additional value by increasing the offshore processing capacity and optimizing the project schedule.
The timing is right for FID, both from the perspective of contractor availability and the external LNG and I'll say more about this later. FID for Scarborough and Pluto Train 2 is on track for the second half of twenty twenty one. We are aligned with BHP on this schedule, which is expected to provide the first LNG cargo in 2026. Since initially buying 25% of the Scarborough resource in September 2016, Woodside has moved the Scarborough development forward. In a planned and deliberate manner, we increased Woodside's interest, assumed operatorship and proceeded through FEED activities in preparation for taking FID this year before deciding to defer FID to 2021.
We recently received the production license for Scarborough from the state and Commonwealth governments, which is a significant regulatory milestone as we target making a final investment decision in the back half of next year. At last year's Investor Day, I talked about the physical size of the Scarborough resource. Today, I want to demonstrate the transformative impact Scarborough will have on our reserve space, our cash flow and the delivery of value to Woodside's shareholders. Resource compared to the Northwest Shelf and Pluto, which are 2 landmark resources that have been key features of Woodside's success to date. You can see that Scarborough is larger than both.
We've also shown a comparison to our total remaining 2P reserves. With Scarborough's development, our reserves will more than double. The impact on cash generation will be a game changer for Woodside. We estimate that the integrated project would deliver net cash flow of approximately $35,000,000,000 over the life of the field based on our current participating interest. Even at a low oil price deck of $45 a barrel, the net cash flow is around 1 was about $1,500,000,000 per year.
Importantly, the internal rate of return for the integrated development is greater than 12%, which is a key investment metric for us. So you can see Scarborough recharges our reserves and will deliver substantial cash to the business. I'd like to now turn your attention to how competitive the project is on the global scene. Scarborough is a globally competitive project with an all in cost of supply of LNG delivered to East Asia of less than $6.80 per MMBtu. This benchmarks extremely well against other pre FID projects, and importantly, is more competitive than U.
S. Gulf Coast projects. The U. S. Projects are recognized as the swing producers in the industry given their higher marginal cost, so it's important that we remain under their cost of supply.
Scarborough is an LNG project well suited to the current environment in which decarbonization objectives are increasingly important. We expect that LNG produced from Scarborough will be a contributor to the efforts of our North Asian customers. The development of Scarborough is also consistent with our own carbon reduction targets. The carbon emitted when producing LNG comes from 2 sources, the CO2 in the reservoir, and the CO2 produced at the onshore liquefaction plant. The Scarborough gas fields contain almost no CO2, so reservoir CO2 emissions are very small.
The proposed design of PLEDO Train 2 will have a lower greenhouse gas intensity compared to the international average and the Australian average. The reservoir quality and train efficiency mean this will be one of the lowest carbon LNG sources in Australia. A key contributor A key contributor to lower emissions intensity of processing infrastructure is high reliability. For Scarborough and Pluto Train 2, we are adopting the best available proven technology to deliver high reliability and lower emissions intensity. Now you've just heard from Tom about our emissions reduction targets, and I want to emphasize the point that we can develop Scarborough and achieve those targets.
We believe our carbon business will develop at a scale, which will allow us to offset sufficient emissions across our business to realize a 15% reduction in net emissions by 2025 and 30% by 2,030, even with adding Scarborough to the portfolio. In our half year results in August, we foreshadowed that we were looking at opportunities to increase the processing capacity for Scarborough from the base case of 6,500,000 tonnes per annum to 8,000,000 tons per annum. We have used the gift of time resulting from the FID deferral to further improve the development concept to match our increased resource size. We have looked across the offshore and onshore designs to identify changes we could make to improve value for minimal additional CapEx. The work is ongoing, and the joint venture is working together to mature this concept.
We are targeting to increase the upstream capacity by approximately 20% for a very modest CapEx increase. There's basically no cost impact on the downstream. We estimate the capacity change could increase our upstream revenue by around 8% over the 1st 10 years of operation. And I should point out that the project metrics provided on the previous slides were all based on the original 6.5 MTPA case, so there's upside potential here. The key contributor to the capacity increase would be by modifying the trunk line.
By increasing the diameter of the shallow water section, the pressure drop through the pipe is reduced, and we're able to push more gas through it. We've also identified optimization opportunities on the offshore platform, the floating production unit, which will reduce the weight and complexity of construction. We've done some work on the drilling plan to optimize the spend and execution schedule. The initial phase of development will include between 7 9 wells, depending on where we land with capacity. Subsequent wells will be timed to meet gas deliverability requirements.
On the right hand side, you see options as to how we'll process the additional 1.5 MTPA of production should we increase the offshore capacity, either by processing the gas through Pluto Train 1 or by sending additional gas across the interconnector to the Northwest shelf. We have used our additional time to de risk the execution schedule for Pluto Train 2 by reviewing and optimizing the construction plan. Our proposed contractor team will be a key contributor to ensuring that Scarborough and Pluto Train 2 are developed in accordance with the business case. Our relationship with our contractors is strong, and we have a high confidence contracting model. As we discussed at last year's IBD, our contracting strategy is designed to derisk the project's cost and schedule by targeting around 90% of the proposed contractor spend being on a lump sum or provisional sum basis.
Are finding the current contracting environment to be very competitive, and this is where we expect to be as we head towards FID. The development of the Scarborough resource through Pluto Train 2 will provide superior value to Woodside shareholders than a hypothetical development concept of bringing Scarborough Gas solely into the Northwest Shelf's Karatha gas plants. There are several reasons for this. First, the Pluto Train 2 concept requires around 30% lower capital spend over the field life, compared to taking the gas into KGP. The Northwest Shelf facility simply is not designed process gas with Scarborough's composition.
It would require significant investment to modify the KGP process and additional spend to extend the life of the Northwest Shelf. These costs are avoided by building Train 2. The Scarborough to Pluto Train 2 concept also extends the economic life of the existing Pluto LNG infrastructure at minimal cost. Secondly, Pluto Train 2 provides the shortest development timeline for processing Scarborough Gas. If the team were to stop working towards FID of the Pluto concept and instead focus on Northwest Shelf, we'd expect this to further delay FID by a We would also be exposed to a potentially more competitive contracting environment.
3rd, Woodside's existing equity interest in the Pluto Foundation project and Pluto common user facilities means that Pluto will receive 90% of the toll paid for processing Scarborough Gas through train 1, and 50% of the toll through train 2, assuming a successful sell down of train 2 to 50%. For processing at the Northwest Shelf, Woodside would receive only 1 sixth of the toll paid. Our increased working interest at Pluto also means that we have much more control over decisions at the site, which significantly derisks the execution of the onshore scope. We are expecting the time to be right for FID in the second half of twenty twenty one, and we have used the extra time to protect value, improve value and derisk our path to FID. We've made great progress on our regulatory engagements and approvals.
Recently receiving the production licenses was a major The target FID timing also allows us to capture advantages in the contractor market, both from a cost perspective and supply chain stability following the COVID-nineteen pandemic. We continue to expect that LNG demand and supply will rebalance around the middle of this decade at a time when the first cargo will be loaded. The LNG supply overhang as a result of new production coming to the market around the beginning of this year has diminished, and we are encouraged by the return of Chinese LNG demand to pre COVID levels. The increasing depth and liquidity of the global LNG market allows Woodside to contract Scarborough production at the right time for the right price. The market fundamentals of LNG remain robust.
The joint venture is aligned on the development timing and concept, and we are collaborating really well on maximizing the size of the pie. And finally, we have worked hard on the development concept to identify improvement and optimization opportunities to enhance the value proposition of of the development. Turning now to the Sangomar field development phase 1. The project has been proceeding as planned since the joint venture took FID in the 1st weeks of the year. The experienced contractor team has demonstrated resilient supply chain management, effectively addressing the pandemic challenges of this year.
They have continued to develop their operational footprint in country. The VLCC tanker that will be converted into the FPSO has been purchased and delivered, and we expect it to arrive in the shipyard later this month around the time first steel is cut. The manufacture of subsea equipment is continuing as planned. Woodside's acquisition of Cairn's interest in the joint venture is is expected to be complete before the end of the year, and Sherry Dewey will outline our plans to divest our equity in the project to around 40% to 50% in 20 21. First oil remains on track for 2023.
We have recently completed processing new seismic data that was acquired earlier this year. The new data has much higher definition than previous versions, providing superior visibility of the reservoir geology. The images on the right compare the old and the new. And you don't have to be a geologist to see the difference. As you can see from the bright blue line through the middle the bottom image, we are in a far better position now to optimize the drilling program.
We can make better decisions on well locations and well paths. We're also better informed now regarding the Series 400 sands, which are likely to be targeted in subsequent development phases. Browse is further back in Woodside's development pipeline as a result of the decision in the middle of the pandemic to target FID from 2023. The Browse joint venture remains aligned on development of the significant Browse resource as backfill to the Northwest Shelf. We continue to progress regulatory and commercial requirements.
Applications for production licenses and retention leases are under assessment with the relevant regulators, and we're moving along the project towards feed entry. The focus is on critical work scopes and optimization of the development concept. We are also using the additional time to assess the potential of introducing carbon capture and storage as part of the development concept. So as you can see, we have a critical 12 months ahead of us as we progress work on our 3 major projects. On Browse, our engagement with regulators and joint venture partners continues as we seek to progress the necessary agreements and approvals to move the project towards FEED.
On Sangamar, execution is in full swing, and we'll keep a keen focus on cost, quality and delivery as we commence drilling and the FPSO conversion. And on Scarborough, we'll commence ramp up of activity as we head towards our target to DefID in the second half of next year. I'll now hand over to Fiona.
Thanks, Meg. And thanks for joining us today. We appreciate your ongoing interest in our business. Today I'll run through our operational performance this year, then talk about how we will continue to deliver value into the future. Operational performance has been excellent in what has been a remarkable year.
Even with tropical cyclone Damien in Q1, which was the most significant weather event to impact our onshore facilities in 30 years, followed by COVID disruption from quarter 2 onwards. And this is a real credit to everyone involved. We're on track to achieve strong personal safety performance, which is particularly pleasing given we believe incidents are preventable and that health, safety and environmental performance is fundamental to our success as a business. We've also achieved high LNG reliability year to date. Realising the benefits of our comprehensive maintenance strategy and execution over several years.
And focusing every single day on the right processes, the right competencies and a high performance culture to deliver results. We have delivered an 18% increase in production year to date compared with 2019. And we've updated our 2020 production range to 99,000,000 to 101,000,000 barrels of oil equivalent. In previous years, we've said that in 2020, we were targeting approximately 100,000,000 barrels. So it's satisfying to see we're on track to achieve this as a result of delivering our near term growth opportunities.
While COVID-nineteen has presented a lot of unprecedented challenges in 2020, it has also given us an opportunity to review and improve the way we work. As a business, we were proactive. We quickly implemented a wide range of controls to manage the health and well-being of our staff and contractors. Things like quarantine periods, COVID-nineteen testing and extended rosters. And to date, we have had 0 cases of COVID-nineteen on our priorities of maintaining health and safety and continuing reliable, efficient operations.
And in doing all of this, we've learnt we can remotely collaborate more and we can perform some tasks differently. For example, we can access vendor support and do equipment inspections remotely at times. Another example is that we've successfully transitioned to remote control of our North West Shelf Gas and Pluto LNG assets for short periods. And we implemented that quickly, faster than we'd ever thought was possible pre COVID. We've learned that applying many of these lessons drives more efficient, cost effective outcomes that we can leverage from now on.
We've also been focused on supporting our local communities and established the Wood Side COVID-nineteen Community Fund to support humanitarian needs, including grassroots organizations who support vulnerable people facing immense social challenges as a result of COVID-nineteen. Through this, Woodside has given nearly $5,000,000 to 70 not for profit organisations, including to community organisations based in the Pilbara in the North West of Western Australia. Our strong 2020 operational performance has demonstrated that we've been able to adapt and respond well to the challenges of COVID-nineteen. I'm proud that during this time, our entire workforce really stepped up to ensure that we maintained operational continuity and supply to our valued customers. We're also delivering on our climate commitments.
We are on track to do better than our target of 5% energy efficiency improvement over 5 years. In line with the commitment made to you at Investor Briefing Day back in 2016. Two examples of what we have done to achieve this. First, we've challenged our operational philosophies to ensure that we consider energy efficiency in all our decision making. And secondly, on Pluto LNG, we've commissioned a second vapor return boil off gas compressor.
And this has contributed to our best ever emissions performance during 2020. As Tom highlighted earlier, we now have very clear near term and medium term targets as we move towards our goal of being net 0 for direct emissions by 2,050. And ongoing efficient and reliable operations are a key contributor to our decarbonization strategy. On cost, we're proud of our reputation as a low cost, safe and reliable producer. And we intend to maintain this well into the future.
This year, we've remained cost competitive with our gas unit production costs remaining around $4 per barrel of oil equivalent, achieved despite the unforeseen costs associated with managing COVID-nineteen. Next year, we're targeting an approximate 15% reduction in North West Shelf cash operating cost and flat unit operating cost at Pluto. A contributor to achieving these targets is the ongoing delivery of efficiencies that we've identified and achieved throughout this year. On the bottom half of this slide, you can see North West Shelf is forecast to be offshore constrained in 20 21. We announced earlier that this year, North West Shelf has agreed non binding terms for gas processing with other resource owners, Pluto and Waitsia.
And we continue to target fully termed gas processing agreements by year end to support a final investment decision. This is another step towards achieving the goal of transforming the North West Shelf into a world class gas tolling facility. In addition to producing North West Shelf reserves. Part of realising the goal of becoming a world class tolling facility is remaining world class on cost. So I'm excited to inform you that during 2020, we have started a comprehensive coordinated program to ensure our past performance of being a low cost producer will continue long into the future.
Our operations transformation will take cost out of the business by improving the efficiency of our operations. We'll take bold steps to apply technology and deploy this at scale into our business. And importantly, it will strike the right balance between automation and decision making, enabling our people to perform at their best. How will we do it? We formed an independent team separate from the day to day running of the business, free to imagine and create a very different future.
It's a talented, diverse team containing business experts in a variety of fields such as engineers, highly skilled maintainers and operators, together with the digital team. And they have the opportunity to redesign and improve the way work. We have multiple concurrent squads up and running right now and they're pursuing high priority and high value opportunities using an agile approach where we demonstrate rapid delivery of value or we stop and we move to the next opportunity. We have benchmarks from other companies and industries showing that significant efficiency improvements in the order of 30% are achievable in the coming years. So in summary, we've had strong operational performance over 2020, even with the challenges that we've faced.
We're on track for strong safety performance, reliability, and best ever production. In future, we intend to remain safe, reliable and cost efficient. Operations transformation is how we'll deliver this and I look forward to sharing the outcomes of this with you in future updates. I'll now pass you over to Sean to talk about new energy.
Thanks, Fiona. New Energy at Woodside is a combination of technology, carbon and hydrogen themes. We have put the building blocks in place for a new energy business that can scale at the pace of the energy transition. Our carbon and hydrogen businesses have built strong partnerships focused on both market demand and technology supply. This aligns with our net zero aspiration and builds on our existing capabilities.
Our focus in new energy started 3 years ago when we saw the external shift in technology and markets open up with potential growth opportunities. In response, we have shifted our spend from exploration to hydrogen, carbon and technology activities. In hydrogen and carbon, the investment is tailored to understand the market potential, the technology and the capability building blocks that are required. And we are focused on the partnerships required to be successful. In hydrogen, we have invested in the Hynet consortium to build hydrogen refueling stations in Korea alongside major partners, Cogas and Hyundai.
The first four stations are online with more to come. Our work in Australia is also progressing well, with our operated H2 Tas Green Hydrogen Project being shortlisted for the next stage of arena funding. And I'll talk more on that a bit later. In technology, we continue to looking further out at applications like quantum computing and how that could be applied to our industry. In the carbon business, we are focused on building a portfolio of carbon offsets and carbon capture and storage or CCS.
So let's start with talking about CCS. As an explorer and developer of oil and gas, CCS utilizes the same capabilities to identify suitable reservoirs and develop a storage solution. As a technology, CCS is becoming more and more prevalent with 19 projects operating globally, with many more in planning. At Woodside, we are screening the 3.4 gigatons of storage potential across our operated titles, as well as project specific solutions like Browse. The limiting factor to date for CCS has always been costs, with an effective carbon cost historically above $100 per tonne.
The industry has learnt from these early projects about how to bring costs down, and it comes down to location, reservoir and scale. 1st, location, meaning being close to infrastructure and access to a concentrated stream of CO2. 2nd, the reservoir, meaning you need a great reservoir tank to store the CO2. And 3rd, with scale comes lower unit injection costs. This is akin to the unit production cost, but in reverse.
The more production or in this case injection you can achieve, the better CO2 per tonne cost. Today we have seen costs come down from $100 per tonne to $80 a tonne, matching many companies' costs of carbon and in advantage locations below $60 a tonne. Let's move on to talk about our progress in carbon offsetting through bio sequestration. As you heard from Jane, 18 months ago, we created a carbon offset business to both generate and acquire offsets through a variety of methods. Objective is to build a resilient portfolio of offsets to enable both our base business and growth projects in a lower carbon world.
Recently, we established a partnership with Greening Australia and our first phase of planting across 3 properties in Western Australia was completed this year. This phase was focused on securing the methodologies and the supply chain of native seeds, all jointly with local traditional owner groups to optimize costs for future phases. We are targeting our carbon portfolio to be at a cost below $15 per tonne. Let's turn to hydrogen. We are focused on hydrogen because of the role we see it playing in the world's energy mix.
It has the potential to play a key role in meeting the growing demand for safe, clean and affordable and reliable energy. We see hydrogen as a natural evolution of our energy export business model post 2,030. We believe that path way will start with blue hydrogen produced from natural gas using steam methane reforming with related carbon management. The process of shipping blue hydrogen as ammonia is a close cousin to our current business model of LNG. In the future, we expect the transition to green hydrogen to occur over different timelines based on the end market use, be it from heavy transport to power generation and to chemicals and industrials as well.
We possess a strategic advantage to produce green hydrogen due to abundant renewable resources in Australia and our technology focus is enabling us to reduce costs. One of the signposts for hydrogen is when governments of countries stimulate market development and our 2 key customer countries in Korea and Japan have fully defined hydrogen roadmaps. But they are not alone. As the next slide illustrates, governments across the world are offering unprecedented policy support and a spectrum of projects are beginning to come online. Many countries have or are in the process of introducing government funded hydrogen transport plans and heavily subsidizing various parts of the supply chain, including electricity, refueling stations and car manufacturing in order to stimulate demand.
This stimulation translates to a rapid expansion of blue and green hydrogen reaching 75,000,000 tonnes by 2,040 or roughly 200,000,000 tonnes of LNG on an energy equivalent basis. It is this growth that underpins our efforts to be part of the hydrogen value chain. Historically, high production costs have been the barrier, but technology improvements can deliver the step change required to lower production costs. As you look at this chart on the right, it depicts the learning curve for batteries, solar and wind technologies over the past decade. The costs have reduced by around 80%, the Y axis.
And as these cost reductions came with scale, the number of installed units on the logarithmic X axis, an exponential drop in costs have occurred over time. Two points to make here. First, the learning curves for solar and wind are expected to continue and this benefits the cost of renewable power, which in turn lowers the production cost of green hydrogen. And second, the core technology components of the hydrogen chain, that being electrolyzers and fuel cells, are about to begin a similar learning curve, So we expect a drop in green hydrogen costs over the coming decade. That will make it increasingly attractive option depending on the end use.
So let's talk about one of those end uses as a substitute for diesel. Our operated project in Tasmania pictured here on the right is a proposed 10 Megawatt green hydrogen production facility using existing hydropower. This pilot will help us learn valuable lessons to enable us to scale in order to meet the growing clean energy demand. As you see on the left, we have line of sight to green hydrogen that is competitive with diesel prices today. So to conclude, we've been taking the right steps to build capability and position ourselves in order to execute at scale profitably in the future.
We have developed partnerships with stakeholders across the value chain covering both technology and market development whilst building expertise. We aim to produce hydrogen local to markets in the mid-2020s and transition to export as the market grows. Our carbon offset portfolio will support our base and future businesses reach an emissions reduction target of 30% by 2,030 as outlined by Tom. And we believe these are the right steps to delivering a profitable business whilst achieving our net zero aspiration. I'll hand over now to Sherry to talk about capital management.
Hello, everyone. It's a pleasure to provide you with an overview of Woodside's capital management priorities and how we're ensuring that we're prepared to fund organic and inorganic growth opportunities. I'm going to discuss how we're applying the key features of our capital management framework to maximize value for Woodside shareholders. I'm sure it goes without saying, but 2020 has been an extraordinary year on many different fronts. The external environment for Woodside has been characterized by volatility in the underlying price of our products, with the chart on the left demonstrating the roller coaster performance of oil price.
Spot LNG price was at record lows at the height of the impact of COVID-nineteen and the LNG supply overhang, but it's been encouraging to see the trajectory of improvements in the second half of this year. Spot price for December 2020 deliveries have improved markedly from the mid year lows up to around $7 per MMBtu. These challenges have been intensified by the practical impacts of the pandemic, requiring us to modify how we work in order to continue to produce and execute safely our growth opportunities. And throughout this, Woodside has demonstrated resilience and prudent financial decision making to protect and maintain value for shareholders. Illustrations of this include the decisions announced in March of this year to defer final investment decisions on our Scarborough, Pluto Train 2 and Browse developments, reduce our planned investment expenditure for 2020 by around 60% and reduce total planned expenditure by 50%.
Cash preservation has been a key priority for us this year, and as an example, Fiona referred earlier to the modifications we made to our 2020 operational plans. We also made and implemented the decision last month to reduce our direct workforce by around 8% to ensure that our organizational structure is appropriate to meet the priorities of Woodside in the near to medium term. Whilst we did cut around 60% of our investment expenditure, we have continued to execute the remaining 40% of activities as planned, progressing projects like Greater Western Flank 3 at the Northwest Shelf, the Pyxis Hub at Pluto, Julimar Brunillo Phase 2 at Wheatstone and of course Sangomar Phase 1 in Senegal. Our response to these external circumstances has been multi dimensional and proactive, ensuring that the balance sheet is strong and ready to support our growth plans at the right time. My colleagues have outlined in their earlier presentations, Woodside's ambitious plans to create value for shareholders.
As Meg discussed, and Pluto Train 2 development is expected to be transformative for Woodside. The opportunities available to us in the near to medium term are a driver for Woodside's capital management priorities over the next 12 months. At last year's investor briefing day in Sydney, I set out our capital management framework and how we apply this to our business. What we're going to do for the next 12 months is set out here. Maintaining cash and preserving value are key in the current environment of recovering oil and gas prices.
We're also focused on appropriately managing our participating interest in Pluto Train 2 and Sangomar and otherwise ensuring that Scarborough and Pluto Train 2 are ready from a commercial and financial perspective for FID in the second half of twenty twenty one. In March we foreshadowed that we expected that the external environment would create opportunities for inorganic growth, which Woodside's strong balance sheet and liquidity would permit us to capture. We're also reviewing opportunities to release value from existing infrastructure. Identifying and assessing value creative opportunities remains a focus, as does protecting our key financial metrics and a strong balance sheet. Woodside enjoys a base business with low cost and strong margin, which provide excellent resilient cash flow.
We have a portfolio of arrangements with customers from long term contracts to 1 off spot contracts, which achieves the right balance between risk, reward, and flexibility to meet customer demand and capture upside. We actively optimize our sales portfolio to deliver this value and manage risk by incorporating price reviews in our long term contracts. After this unprecedented year, we expect our proportion of spot sales in 2021 to return to around 15% to 20% on an annual basis. Our current proportion of spot prices in 2020 is working to our advantage in Q4 as spot LNG prices improve. Now this is a great story for Woodside shareholders.
As the chart on the left shows, we've demonstrated sustained strong cash margins greater than 70 5% for our business as commodity prices have varied through the cycle. Our cash margin year to date is around 79%, demonstrating Woodside's ability to quickly and proactively respond to lower oil and gas prices. This performance reflects our ongoing focus on cost management and high operational reliability, and is a key contributor to ensuring a strong balance sheet. It demonstrates our resilience to lower oil and gas prices. We've provided a strong dividend yield in 2020 as this chart shows, in comparison to both our Australian oil and gas peers and the ASX 20.
Of course, eligible Australian shareholders receive additional value from the distribution of franking credits. We currently have a franking credit balance of around AUD 2,300,000,000 We expect to make big decisions in the next 12 months as we take our next steps in our growth plans. The most significant, of course, is the final investment decision on Scarborough and Pluto Train 2 targeted for the second half of twenty twenty one. This decision will commence active value creation over the next decade and beyond. A major capital management lever we will use is reduction of our participating interest in Pluto Train 2 and in the Sangomar development.
For Pluto Train 2, we're aiming to reduce our interest from the current 100% to a target of around 50% prior to FID. This would significantly reduce our capital spend by about $3,000,000,000 and this would exclude the proceeds of the sell down itself. We continue to engage with potential investors in Train 2, including infrastructure investors. For Sangamar, we flagged in August at the time of announcing our proposed acquisition of Karen's interest in the project that we'd be looking to reduce our equity interest over the next 12 months. This is an attractive de risked asset in execute phase with near term production from 2023.
We have interested parties, and we're targeting this sell down to the right partners at the right price in 2021. Reducing our equity interest in Sangamarc to around 40% reduces further our capital spend by approximately $1,200,000,000 excluding the proceeds of the sell down itself. From these 2 proposed divestments, we'll achieve capital savings north of $4,000,000,000 again excluding the proceeds of the divestments. We'll also continue to explore opportunities available to us to monetize our other assets. Woodside has a strong liquidity position as a result of active preparation for FID of Scarborough and Pluto Train 2 and the resulting increase in capital expenditure.
In this current environment in which we've prudently delayed FID, our strong liquidity position provides significant optionality for us to undertake accretive inorganic opportunities. And I'll say some more about how we're approaching this a little later. Similarly, we've been preparing our well structured and low cost debt portfolio for growth, which remains primed and available to support major investment decisions next year. We have multiple capital management levers to pull in order to fund our transformative growth plans. Reduction in interest in Pluto Train 2 and Sangomar would significantly reduce Woodside's capital expenditure requirements.
Ongoing active debt management, focused expenditure management and continuation of the dividend reinvestment plan are other capital management levers available. Our business development and growth team is actively monitoring the market and analyzing growth opportunities in the current environment. We're on the lookout for opportunities which are value accretive, which meet our investment targets, which typically include an internal rate of return above 12%, a value investment ratio of greater than 0.25, and depending on the opportunity, a payback period of less than 8 years. We undertake a holistic review of each opportunity against our strategic priorities and broader commercial considerations, and in this slide we've summarized some of these. We have a bias to quality Tier 1 assets with a medium or near term production.
A clear link between a target and our investing business, whether that be geographical or from a capability perspective, is often a positive. We also take into consideration sustainability and carbon management issues. Our confidence around securing the value we see in an opportunity is central. These commercial considerations include the balance sheet impact, our degree of alignment with our likely partners and the resilience of the opportunity to oil price fluctuations. In the end, our focus is on identifying transactions which will reliably deliver value to Woodside shareholders.
As Fiona mentioned earlier, our 2020 production guidance has narrowed to 99,000,000 to 101,000,000 barrels of oil equivalent. We're expecting our investment expenditure for the full year to be between $2,100,000,000 $2,300,000,000 The increase in guidance is primarily due to the additional expenditure in Sangamore Phase 1 as a result of increasing our participating interest. There's a similar impact on our guidance for total expenditure in 2020. We've provided line item guidance for net finance cost and depreciation and amortization. Our estimated unit production cost for 2020 has increased by approximately $0.40 per barrel of oil equivalent due to COVID-nineteen and related events.
In summary, as we look to 2021, our shareholders can expect to see Woodside prepare financially for the upcoming targeted investment decisions in Scarborough and Pluto Train 2. This will include targeting a reduction in our equity position of Pluto Train 2 to around 50% before FID and for Sangamar to around 40% to 50%. These transactions would significantly reduce capital expenditure in following years. Similarly, identification and assessment of value accretive opportunities will be ongoing. And all of this will be undertaken against the backdrop of Woodside's resilient base business and strong balance sheet.
Next, we'll have a short break to provide an opportunity for you to stretch your legs, and we look forward to reconvening in 5 minutes for Q and A with Peter.
Welcome back, everyone. I hope you found those presentations very informative. Now we have a question and answer session that will run for about 45 minutes. As I mentioned previously, the questions will come in live via teleconference and then of course, so investors have the opportunity to send questions to us and we'll wrap all of those up. So let's throw to the first question.
Peter, the first question is from Adam Martin on the telephone line. Yes, Adam.
Yes, good morning, good afternoon. Just in terms of costs and thanks for that disclosure on Scarborough. Obviously, if you increase the upstream capacity, and sort of hinted there that it might actually lower that breakeven and touch more. Can you just talk through that a bit more and be able to sort of provide a bit of guidance there a bit more detail?
Thanks, Adam. I'll let Meg speak to that.
Thank you, Peter, and thank you, Adam, for the question. It's a great question. So the slides that we presented today are based on the current reference case, which is the 6,500,000 tons per annum case. As I noted, we're working through all the details associated with the expansion. Our current assessment is that there will be a modest cost increase, but of course the capacity increase far outweighs that.
So at this point in time, we're not prepared to give guidance about what our UPC or our breakeven cost of supply will look like as we go to the 8,000,000 tons per annum, but you've inferred correctly that it will lower the breakeven cost compared to what we showed you today. Thanks.
Okay. That's good. And just second question there, just got a question. I spoke on the divestment around Pluto Train 2. Obviously, the energy transition is moving quickly.
What sort of feedback are you getting from infrastructure investors? I suppose just regarding to ESG risk stranded asset risk, perhaps you could summarize some of that, Peter, given some of these discussions over the last year?
Yes, it's a really good question and Sherry has been on top of this one. So I'll let her speak to it.
Okay. Thanks greatly for that question. And as you can imagine, the ESG portion of it continues to be very important. We've talked about the fact that Scarborough and Pluto has an extremely low carbon footprint in terms of the CO2 content in that. But I think more importantly, the interest that we're seeing coming through from infrastructure investors has really just gotten stronger in the current environment.
The way that we're looking at structuring the transaction and that mirrors the way the toll is constructed is that there is no price risk or LNG or oil price exposure that goes into the infrastructure investment value proposition. And so that's something that's really as strong as it ever could be. And of course, people are also attracted by the overall energy transition story that Woodside has to tell. Thanks for that.
Okay. Thank you. I'll let someone else
answer the question.
Next question from James Byrne from Citibank. Go ahead, James.
Good morning, Peter and team. Thanks for taking my question. So Slide 54 in share section, I was quite surprised to see that there's no longer an intention now to farm down Scarborough from its 75% working interest. I was hoping you might be able to provide some commentary as to why that was no longer the case.
Okay, it's a good question. We kind of looked at where we can get value out of the project. And as you know, we tested the market about 18 months ago on an integrated
And then the market ran away from us, to
be quite frank. Pricing ran away, And then the market ran away from us, to be quite frank, pricing ran away and we said, look, it's really we're not getting the value in the marketplace at the moment, so we'll hold onto it. Our focus now has in recent times has really been for infrastructure investors coming into Train 2. We see that's where the best place is for co investors to come into the particular project. Our view, of course, is that Woodside investors want to be exposed to the commodity risk.
That's what our cost of capital is based on, it's based on a certain risk profile. And so at this point, we've said we want to keep as much of that upstream as we possibly can. We've said that before, I've alluded to that in previous presentations and our current planning base is that we'll hold on to that upstream. It's just simply not a good time in the market to be trying to sell that. Now if at some point post FID somebody comes along and offers us an offer that we really can't refuse, then of course we'll look at that at that point in time.
But the market conditions as such, sort of the moment from a planning point of view, we think it's appropriate to maintain the upstream and then of course sell 50% of the Pluto Train to other investors, very likely infrastructure investors.
Yes. So I guess after your post results marketing in late August, I mean, investors came away with the expectation that if you're going to be monetizing Scarborough by building Train 2 then that was going to come with an equity check that was going to be written. And for the record, I don't necessarily think that's a bad thing if you've got a good project. But if I then think about Scarborough staying at 75% and the CapEx for an 8,000,000 ton per annum project is, let's call it, dollars 6,000,000,000 to round off, then you're talking about an extra $1,500,000,000 of equity that would potentially need to be raised to cover that CapEx. I'm just wondering how you then think about that trade off between dilution to the owners of your equity and the risk in having 75% of an upstream project, For me, I'd still would have preferred to have seen you continue to test the market even though conditions at the moment aren't particularly favorable for farming down, at least going into your FID over the next 9 months or so.
Look, let me let Sherry run through this. In her presentation, she alluded to some of the capital management levers that we have. We're confident we've got a pathway here that matches balances the requirement of the equity investors versus the amount of debt that we need to take on. We've got a clear pathway for that, but Sherry can give a bit more color to it.
Yes, correct. And thanks for that. And as you mentioned, you'll note that in my presentation, I did not use the word equity for a reason, and that's because when we think about the activities that we have underway, both to dilute our interest back down to around 40% to 50% for Sangammar, where I've mentioned we already do have strongly interested parties, and also to focus on Train 2 to around 50%, but again, some flexibility in that. And then finally, perhaps looking at other opportunities across the portfolio to commercialize and monetize portions of our infrastructure assets. When you take that together with the cost optimization and reduction activities that we're doing across the portfolio and also looking at our dividend reinvestment plan that's been performing very well for us throughout the last three periods, we believe we've got multiple pathways to go through that without needing to rely on equity as support, even in the case where we maintain the larger working interest for Scarborough.
And as we look at the 8 case and the increased value around that, we think that's so value accretive for our shareholders that like Peter said, unless someone comes along and gives us an offer that's too good to refuse, it is actually worth much more for you if we hold on to it and develop it in those higher volumes.
So, I guess the messaging's a little bit contradictory over the last few months after the results when it was where the messaging was more going down the path of using equity to support the CapEx. I'm just confused as to what's changed between late August and now here in early November about whether you made new equity or not?
Messaging has been very clear from us and we've never told the market in fact that we'll need to raise equity. That's been speculation that's been coming from the analyst pool to be quite frank. So, I'm glad you're asking the question because we're dealing with it today. In our view, we're working down a path where the likelihood of raising equity gets smaller and smaller. And that's clearly where we are.
So, for those who are sitting out there thinking that Woodside is about to raise equity today, that's clearly not our plan today. We'll make decisions as we come closer towards FID. But, our plan at the moment is to avoid raising equity to the extent we can. Now, of course, there's a balance there. It's going to be around what free cash flow is going to be between now and our FID decisions.
So, you know, how much of our debt are we able to run down, how much cash do we have in bank, what do our ratios look like. So, there's a lot of factors there and we'll be balancing that up against the ratings agencies requirements as well. So, I just say there's a lot of moving parts, but we're certainly not going the first part that says we need to raise equity. In fact, no, the first part we've always said is self help and self help is through managing the amount of equity we invest in each part of these projects. And for us, as we've said, we believe with the pathway of getting Sangamard back down to 40% to 50%, the pathway of getting Train 2 away down to 50% or even lower, then of course it takes a lot of that pressure off us.
And once we've done that, of course, then we'll just need to assess where things are. But as you know, the balance sheet is in good shape, the gearing is great at the moment. Free cash flow is still strong. And some of the projects that we've got underway at the moment will start to roll off next year in our capital spend, so free up a little bit more space for us. But I'm glad you raised the question because I know that speculation is out there and I simply just don't know where it came from.
Yes. Okay. Look, the last thing I wanted to ask about is just around emissions reduction. And I think that the disclosures you put out today are pretty good starts. But I guess from our perspective in the market to understand the merits of it, we also need to know what the cost base is for that emissions reduction and maybe it's just too early to be able to provide that kind of guidance.
But I thought about a spectrum here of costs emissions abatement. You previously talked about Brows being in excess of $100 a tonne. Peers like Cooper Energy think that they can do it for $10 a tonne. So in order of magnitude cheaper and then you've got peers like Santos that might be able to turn it into a revenue stream. Just wanted to understand if you thought about Woodside as a corporate and the equity emissions that you're looking to offset, where do you think you'd be on that kind of cost spectrum to be able to achieve your targets over the next 5 to 10 years and beyond?
Look, it's a good question. I'll let Sean answer that one for us and Tom may chime in as well.
Yes, thanks for the question. In my slide, I kind of gave you a portfolio mix of offset emissions and what we targeted there was for $15 as our balance across all those both international, domestic already in market, plus a new origination that we create and getting that balance and targeting around $15 per tonne for CO2 for that bio sequestration. And we believe that's achievable from what we've seen both on the existing projects and the planting that we did this year as eminently achievable. You're right. When it comes to CCS, the cost ranges are really quite wide.
You know, I'm not sure around the 10, but certainly the kind of the $40 to $100 range, very much dependent on whether or not you're sequestering onshore where your CO2 source that would be in the lower end versus some of the offshore projects. And the quality of that reservoir so if the reservoir can really take a lot of CO2 at once then, you'll be able to see lower costs for carbon. Now to your point around whether or not this is a future business, right now our focus is getting our emissions abated, offset for our targets, but yes, not closing the door on a future business. Thank you.
All right. Thanks very much guys. That's all for me.
Thank you. Look, everybody, it's just about to turn 11 o'clock here. So, just to respect those that have fallen to allow us to be here today. We're going to take a 1 minute silence now. Welcome back, everybody.
Now next question
Next question is from Mark Samter at MST MK.
Yes, morning, guys. I've got 4 questions actually, which I don't know if it's stretching the friendship. I can come back on the end if it's getting too much.
Sure.
I guess the first question probably for you, Peter or for Meg looking at Scott. But if we look at your Slide 23 and you talk about your $6,000,000 Btu breakeven, Your old deck you used for the impairments was
Looks like we've lost Mark. Yes. Sorry, we'll get Mark back on the line as soon as we can. Why don't we move to the next question?
All right. Tom Allen from UBS. Tom?
Okay.
We'll sort that out. We have had a question, Peter, from the webcast from Daniel, just asking, what is the outlook for Q4? Is Woodside expecting a big increase in revenue and profit compared to Q2 and Q3?
It's a good question, Daniel. Look, I'm not going to give you a revenue prediction, but what I can do is point to pricing. So you might recall in the Q2 of this year, pricing really hit a low. Now it impacted Woodside in 2 ways. One is, we had a lot of spot LNG cargoes that went into the market.
So you might recall the spot price for LNG against the benchmark marker being Japan, Korea market went down to around $2 per 1,000,000 BTU. So that affected a large proportion of our volumes, roughly 40% of our LNG volumes were sold on the spot prices in that kind of second quarter period. Oil prices though kind of held up, so you might recall that we have a linkage to oil prices in many of our long term contracts that is a 3 month lagging average. And so, of course, the low spot prices were offset a little bit by the fact that we had lagging prices from the Q1 of the year. Of course in Q2 spot prices increased, but then of course the oil price component of our contracts kicked in and we saw those 2nd quarter oil prices.
Now of course all of that's now washed through and you've seen a firming of oil prices now through Q3, and also a firming of spot prices. So spot prices today that we're selling into the market have gone from around $2 roughly $6.75 today, we even saw $7 earlier in the month. So you can see pricing has gone up a lot in the spot area of the market. Of course, we won't be at 40%, we'll be somewhere between 25% to 30% of our product will be sold as spot, and then correspondingly oil prices have also firmed quite significantly and have been trading in a range of around $40 per barrel. So both of those factors really point to an increased revenue stream coming through for us in the 4th quarter.
Peter, got another question from Adrian Prendergast through the webcast. We're interested in better understanding your expectation for Browse's return profile, given consensus values are materially below our greater than 12% IRR hurdle target. And also how does BROW's carbon profile compares to Scarborough and how does it fit in with your longer term carbon goals? Right.
Let me throw to Meg to answer that one and Sherry may want to comment as well.
Okay. Thank you, Peter. So with respect to Browse, as we communicated in March, we've pushed our decision to advance that project into FEED and towards an ultimate final investment decision out by a couple of years. But that's not to say that the team is sitting oddly by. They're working on a number of critical activities as we speak, which is obtaining the necessary environmental approvals, obtaining the production and retention licenses that we need to keep title over the resource.
And importantly, a big, part of the team's effort is focused on value improvement. Now there's value improvement in 2 spaces. 1 is looking at the economics of the project, and we've put a challenge to the team to make sure that the project is economically attractive at a wide range of prices. And so they're looking at things like design improvements, changes we might make to the investment profile, things we can potentially do to try to improve recovery through the, of the gas from the reservoir. The second area that the team is working is carbon capture and sequestration.
Obviously, the Browse CO2 intensity is higher than Scarborough. That said, it's very consistent with other fields that have recently been developed in that part of the Australian offshore. But we are looking at things that we can do in the self help space and the FPSO design, even as we were progressing it over the last few years, has always maintained space where we could put the equipment required for CCS, if we got to a point where we thought that was economically attractive.
So the
team is continuing work in that space, looking at both the subsurface and the facilities questions, and we feel like we can meet all of our carbon commitments with the Browse CO2 emissions.
Thanks, Meg. Sorry about that, Mark. You were about to throw to your first question.
So sorry, should I repeat the question?
Yes, please.
Yes, so I was just saying if we look at Slide 23 and you've talked about a $6,080,000,000 BTU breakeven, Your order that you used for impairments was $65 a barrel. And if we take the pretty well publicized Qatar contractors, the 10.2 slope DES Asia as the line in the sand for current LNG pricing. I guess on those assumptions, you don't reach $6.18 million BTU. Against that backdrop, can you talk about, a, what you're thinking on your contracting strategy, how much you want contracted before you sign? And can you foresee a world where LNG markets prohibit you being able to get this project off the ground?
Yes. Mark, as you're probably aware, Meg has now just taken over our marketing I'll let Meg kind of walk through the thought process that we have around that.
Thanks for the question, Mark. So as I noted, that graph is prepared based on the current case, which is the 6,500,000 tons per annum case. And the work that we're doing to optimize the design will improve further improve the globally the global competitiveness of the Scarborough Train 2 investment. Now that said, there are a number of steps that we're trying to take or that we're taking as we think about the LNG market. And the reality is the LNG market has changed very dramatically from the last significant investment that Woodside made in Pluto.
So if you think back in time to a decade ago, we were at a point in time when a significant investment decision like this required offtake certainty. And so when we made that investment, it was very important that we had all of our long term contracts locked up. As we reflect on the LNG market and how it has evolved over time, the market is far more liquid. So there are more customers buying LNG today than ever before. We expect over the next years that number will increase.
And so if we think about the market conditions today, we're actually in no rush to try to tie up all of our Scarborough and Pluto Train 2 off take. It's sort of interesting if you think about it, we're in we're in a buyer's market. So as we think about going out and buying services from our contractors, purchasing the goods and services we need to develop the fields, we feel like the timing is right. Equally, as a seller of LNG, we don't feel like we need to be rushing into deals that would be value damaging for the Woodside shareholders. So we have a number of HOAs.
We're continuing to try to progress those to fully termed SPAs, but we're not going to be rushing out to try to secure deals at some of the low prices that you would have seen in the marketplace today. Thanks.
Yes. I mean, I
guess just following on from James' question before then, I'm presuming in that world, it's a lot harder to secure debt against uncontracted projects. So again, probably the mix of equity funding increases for a project where you don't take as much contracted first?
No, not really. And it comes back to the strength of our balance sheet. But I'll let Thierry kind of walk through our thinking on that, Mark, and why we believe Woodside actually has a competitive advantage compared to some of the other projects you see around the world.
Yes, correct. Thanks. And if I could just take a minute at the beginning also to clarify two points around our impairment testing since that was the first part of your question, Mark. I think the first thing to keep in mind is that the impairment testing, of course, was also done on the 6,500,000 tonne per annum unoptimized case and things only get better as we move forward. The second thing that's important and probably aware of this, is that when we look at the price decks that we use for impairment testing, we take a basket of what we believe overall for the forward pricing.
Now of course, even at the time we did impairment testing, we've been aware for some time that Qatar, as an example, is coming in as the low end of the cost spectrum on supply coming into the markets and you could imagine that there might be low pricing that goes along with that, but that's one price point, that's not the overall market. I'd also just remind that when we look at our projects, putting impairment testing aside, we look for IRR returns of greater than 12% at 65, but we also stress test at $50 with lower slopes along with that. And in the COVID environment, we've even been stress testing at prices below 50 and slopes commiserate with that. And that's still a very economic attractive project, even at 6.5. The other answer to your question around funding, I think is quite simple is that we're not planning to use project financing and that's been something we've been clear on all along.
That's a flexibility that we have that is a clear advantage to us versus other projects that may need to rely on project financing and therefore need to secure a certain percent or actually a high percent of contracted volumes to enable that project financing to occur. So we have no constraint from that perspective as we'll be looking fully at our balance sheet funding and we can fully optimize the other levers that we've talked about as we go to FID. And that's really great for us because that leaves us full freedom and flexibility from a marketing perspective to sell at the right time, at the right price, to the right customers. Thanks for that.
Mark, you had a couple of more questions. Okay, we'll move on. Next question?
From Tom Allen at UBS. Tom?
Hi, Peter and team.
So just following on a couple of questions that we've had related to the 75% carrying of Scarborough upstream, and I apologize to continue on this theme. But perhaps another way to ask it is, it appears that you're placing a lot of value on the HOAs that you have for Scarborough Gas. I was wondering if you can provide some more color on
those HOAs and the mechanisms around it, just to give investors the same confidence that you have that the HOAs will convert to SBAs upon FID?
Look, I'll take that one time. I think the key here is we're not relying on those HOAs as Meg alluded to. Woodside's been developing a portfolio now for a number of years. We have a trading capability based in Singapore, and we have shipping that goes along with that. So, we're looking at it and saying, what do we really need to get across the line at FID or could we do what some of the super majors have been doing now for some period of time is just simply selling into our own portfolio and then on selling that as market conditions improve.
And that's where we're heading to now. And so, the point that Meg was making around, the old thinking was you had to have 80% of a project sold before you could get it moving, right. That might be the case for smaller companies that don't have as robust cash flows and balance sheet. It's certainly the case for projects that need to be project finance and you see that happening in Russia, you see that happening in Africa and so forth. But that is not the case for Scarborough.
We will finance this off our balance sheet. And we have the marketing capability capacity and we have time on our hands. So there's a lot of time between FID and first production. If you look at the market today, it's a low point in the market. Historically, if you look at these sorts of slopes, it's a low point.
Why would you be selling into the market today? Equally, you know, the benchmarks that people want to get out there, you know, the Qatari volumes, you've got to take all of that with a grain of salt. There are clearly G2G relationships there. The Qataris need to build 100 ships. You've got to look at the Korean deal in the context of both the gas they're selling and also the ships that they would be purchasing.
I'm sure that was a package deal. And you look at some of the other ones as well, there will be G to G relationships. So you've got to stand off that, don't take that as your headline number, don't jump in too quickly, don't panic, just back yourself, we've got the capability, we know that across a number of our contracts, we know what the 2nd tier buyers are willing to pay or need to pay, and we have a strategy around that. Now the HOAs we have in place, we're still engaged with those parties. Obviously, COVID has slowed down the conversion of those HOAs to SPAs simply because we can't get across the table from people.
But we are continuing those negotiations. And as the project starts to de risk itself, the buyers come along. So, once we start the project up again, and we're planning to start Scarborough up again early next year, start the engineering ramp up, the buyers will then get the confidence then to start moving forward to completing those SPAs. You're just not going to get them completed today because we put the project on hold, or on a slow burn. Once that starts to ramp up, you'll get that again.
But my message really is, we don't need to have a specific target, for the amount of gas we need to sell to go to FID. And if we do this today, it will be a value destructive price.
Okay. Thanks,
Peter. And then just on your plans for carbon capture and storage to drive future emissions reductions. Can you share some color on what technical work you've done to confirm reservoir suitability for CCS across your target assets?
Yes, good question. I'll let Sean answer that one.
Yes, thanks for the question. Really, we know a lot of these reservoirs super well because we've been producing them for, you know, near on decades for some of them. So it's turning that reservoir knowledge kind of in reverse to how much carbon can we inject, can we reuse what infrastructure, what needs to be replaced. So it's kind of around 2 fronts. 1, understand that reservoir, its container potential, its injectability and then 2, what's the infrastructure that you can reuse or you need to put in place.
And then you've got to combine all of that I guess with where is the CO2 source coming from and matching them up. And that's the work that's underway. We've started in the reservoirs because that's where we know the most, and of course as Meg has previously discussed, really 2 is well focused on browse and what we are doing there to support the browse project when it comes to CCS.
So early days. We'll move to James Redfern.
Sure. Hi, Peter. Good morning, everybody. Just a couple of questions, please. So I guess the first one, I just want to confirm that the 12% IRR for Scarborough is based on $65 Brent long term.
And then I've got 2 more, please.
Yes, it is.
Okay. Thank you. I mean, obviously, that's a long way from the forward curve at the moment at $46 a barrel, but I guess your view is that you do expect a strong recovery in oil prices.
Yes, look, James, I'd be really careful, and I need to pick people up on this. I mean, there's 3 elements that you've got to look at. 1 is what you think the Brent price is going to be. The other one is what you think the slope is going to be. And so, we actually back into this a little differently.
We look at what we think the market bearable delivered price is. So whilst we may put $65 out there in the marketplace, we actually back calculate that and test it against what we think the range of market bearable deliverable prices are into North Asia. So, that's the key. I think we need to start changing the conversation and moving away from what the Brent price is, because as we've heard today, slope has a huge impact on it as well. What discount rates you have makes a huge impact on it, And so that gets back to your financing costs and your risks.
So I think we just need to start having a more sophisticated conversation around what how we generate returns.
Yes. No, I totally understand. Second question is around Sangamah. FAR this morning announced that they agreed to sell their interest to India's ONGC. Should we expect Woodside to preempt that transaction or do you feel that Woodside is full in terms of its exposure in Senegal given the plans to sell down next year?
Look, it's a really good question. Clearly, in our view, this is a distressed sale, so the price that was being received doesn't really reflect the underlying value of the asset. So ONGC have been opportunistic in the marketplace. We've got 30 days as we did previously with the CAN transaction. We'll look at it over that 30 days and decide, what's best for Woodside in that.
So kind of slightly different conditions. Look, the good news is, ONGC are clearly a company that's very financial. They're a large organization. So some of the issues around cash flows and so forth hopefully will be dealt with. But equally, as you quite rightly point out, we'll take Woodside further up in our equity stake, that's not where we want it to be.
But also, you know, it's a value accretive opportunity. So I think we need our teams to have a good look at it.
Thanks, Peter. And just one last one. I just want a bit more color in terms of the spot LNG exposure for next year at 15% to 20% compared to 30% this year. Should we infer that some midterm contracts have been signed in recent months to reduce that spot exposure? And if so, I mean, are those slabs kind of in that 10% to 11% range?
I'll let Meg address that for you.
Look, thanks for the question. I think that question is best answered in reflecting on 2020. So our philosophy around Spot is unchanged. And when we started this year, we had Spot in that target range of 15% to 20%. And we actually think that is quite value accretive for shareholders.
Whilst there are points in time where you might be exposed to lower prices, when you look at the performance over the last few months in the winter particularly or when there are supply outages from competitors, you can see spot prices go up very dramatically at an equivalent slope that would be in the high teens, for example. So we are quite deliberate in our design of our annual delivery plan to have that 15 percent, 20% range of spots in the mix. Now this year of course was quite unusual. In the Q2, we had two things happen. We had a demand shock, so our customers exercised their contractual rights to reduce quantities, and then we also took some decisions not to do some planned maintenance, which means our production was higher than expected.
So the 30% in 2020 is a little bit higher than where we had planned to be at the start of the year, 15% to 20% for next year is where we have are quite deliberate about wanting to be and we feel like that's the right price exposure for our shareholders.
Okay, Megan. Thank you very much.
Gordon Ramsay from RBC next. Okay, Gordon?
Thank you very much. I've got a question for Meg. It relates to Slide 27, which is a discussion about Pluto Train 2 increasing value. There's a couple of questions here. The first one, your Slide 27.
The first question relates to the comment that the Northwest shelf is not designed for large volumes of Scarborough gas. What does that mean?
So it's a gas composition question. And I think it's a little bit simplistic to think about. You've got all this gas and you've got all these processing facilities. You can't put any gas in any processing facility. So the gas that we produce from the Northwest shelf is a very rich gas that has a few kind of attractive features to it.
It produces LPG, it produces condensate, but it also generates the mixed refrigerant that we need to keep the trains to keep the trains cold, which is ultimately what makes LNG. LNG is a fairly simple process. We separate out the gas and we make methane very cold. The Scarborough gas, in contrast, is extremely dry. So we would need to make very extensive modifications to the Caratha gas plant to be able to handle that very dry gas.
Could you not blend the gas?
Look, we have modeled this and our process engineers have been elbows deep in models for many, many years. Blending can get you part of the way there, but it can't it can't enable you to handle the full quantity of Scarborough Gas. Now when I talked about the options in the 8,000,000 ton case, I showed that one of the options is to take a slipstream, about 1 and a half 1000000 tons of Scarborough gas across the Northwest Shelf, and that would be a blending case. So we would be able to blend, we would need some modifications, but not as extensive as we would need if we wanted to fit the full 8,000,000 tons through the Northwest Shelf.
And then the second question, thank you. The second question relates around the comment that the new train is more cost efficient than modifications to Northwest Shelf. Do I assume that relates to life extension work on the Northwest Shelf?
Yes, absolutely. So the Northwest Shelf has, as you know, 5 trains. The oldest trains are more than 30 years old. The newer trains are more than a decade old. So we would need to make those modifications to be able to handle the very dry gas, and then we would expect to see continued investment in the Northwest Shelf in the Karatha gas plant to be able to process those large volumes of dry gas for a very long period of time.
And just one last one for me, just again on the operational side, this may not be you Meg, but in terms of LNG capacity coming up at the Northwest shelf, I think it's Slide 36 in your slides, you've talked about what the chart implies that basically 50% of the capacity will become available by 2028. There's early ORO, which I'm assuming is Huizia and Pluto. And then you've got the Scarborough option. Just so I just get a handle on volumes here, the Scarborough option is at 1,500,000 tonnes, which is 1,500,000 tonnes. What is Pluto?
So on early Ouro, we are looking to fill that allege and the graph that you see is indicative. There's a range of different outcomes dependent on reservoir outcomes. But we are looking to finalize the terms of that gas processing agreement by year end. In the event that early Ouro does not transpire in that scenario, then we will be looking to shut down trains. And the first train that will shut down is likely to be a smaller train likely LNG 3.
And that will be in as early as 2024.
I missed the year at the end, what was that?
2024, in the event of a no RO case.
Thank you.
Thanks, Gordon.
Peter, next question is from Peter. Lou from Credit Suisse.
Okay, Peter. Peter, go ahead. Hi.
Yeah.
Peter from Credit Suisse. I'm asking a few questions on behalf of Saul. He is chairing and CEO at Oil and Gas Conference today. So my first question is related to the SKU Straubara. So Peter, I think you mentioned before you want to see oil price stability over several quarters before the FID.
But let's just suppose if oil price remained below $50 but they remain stable below $50 at this time next year 2021. Would you still sanction the FID for Scarborough?
It's a good question, Peter. We'd have to have a look and see what we thought supply and demand was doing. I've mentioned previously, I'd like to get at least 3 quarters of stable pricing starting to come through. It looks like the Q4 of this year we're getting that stable pricing. We said the supply demand should have flip over in Q3.
We saw some of that. However, we've also seen another wave of COVID coming through Europe. So, for us, we've kind of got to get through this northern winter and see if that demand comes back into the market. There's also some questions around what OPEC's going to do and whether they'll continue their current cuts or whether they'll start to move away and put more supply into the market. So we're going to see that in the Q1 of next year.
With respect to a and that'll give us then some signposts as to whether when we think the pricing conditions are going to be conducive for an FID. Now the $50 number out there, know, it's an indicative number. It might be 48, it might be 52. Really it doesn't matter because we're
obviously making long term decisions with respect to where we
think pricing will go. Strengthening trend that will give us some confidence that we can go to FID. Equally, we'll be watching the contractor market very, very closely. The pricing we've got currently is pricing from 12, 18 months ago. We expect that to get even more competitive, so we've got to go back to the contractor market.
We'll be doing that in the Q1 of 2021. So it's one of those things you might recall, I said the key to maintaining margins in the LNG business is being cost competitive. That means building at the lowest cost and operating at the lowest cost, and there will never be a juxtaposition of high prices and low costs. And so you've really got to be confident that you can move forward and look at all those market conditions. So I'm not going to set one parameter and say that's it, but I would say, indicatively today, the market's starting to play out the way that we'd hoped.
Sure. Thank you. My next question is regarding the BHP alignment. So can you provide an update in terms of your negotiation with BHP in terms of the Scarborough tolling agreement via Pluto Train 2? And is BHP currently covering its share of upstream cost at Scarborough?
Yes. Look, I can answer the second question first. The answer is yes. With respect to the first question, we'd almost completed the tolling agreement, so we're almost about to sign on the 6,500,000 tonne case. And then both BHP and ourselves as part of the Scarborough joint venture looked at opportunities to increase capacity.
BHP is very supportive of that. And so we've now had to restart those commercial discussions because it has implications on Pluto Train 1 and the common use facilities. So, we are at the moment negotiating what we call a closed loop system. That closed loop system would have all of the Scarborough gas being processed within the Pluto facility, so that's the 8,000,000 tonnes plus the domestic gas commitment that comes with that. As Meg mentioned or Fiona mentioned, there's also an opportunity to slipstream some gas through the interconnector that we're proposing across the North West Shelf.
We're not discussing that case at the moment as part of the Scarborough joint venture. We're really focused on the closed loop. So I think the message is we were very, very close to inking a final agreement. We then decided to change the concept. Both parties were very much aligned on that.
Just means now we just have to go back and do a bit of a doo loop and just make sure that those commercial agreements now reflect a larger capacity train.
And we might move on to the next question, Dan Butcher from CLSA.
Go ahead, Dan.
Yes. Hi, everyone. I guess
the first question is I'm just wondering actually getting off gross projects back to existing projects. You've got about 2.5 Tcf of net gas undeveloped. Just curious whether you could give us an idea of the cost developing that. I think some presence of Pluto for example were $9 a BOE. Where do you think it's headed from there for the remaining 2.5 Tcf?
You're, Danny referring to 404P?
Not as 404P, but the whole 2.5 Tcf net you've got undeveloped on your reserve statement.
Yes, I think most of that is 404P and we've given an indication previously that the cost we haven't really updated the cost range on 404P for a while. As you know, we've kind of pushed that back in the queue with respect to where we think we're heading. It's competitive, but we haven't given any indication as to what we think the development costs for that. It's probably best I don't do that today or else I'm just going to give you the wrong number. But we'll come back at the right time and make sure the market's appraised to what we think that future reserve development cost is.
Sorry, you're cutting out. I don't know if you can hear me, but
But basically what I said, I'm not in a position today to give you a future development cost for a lot of that resource. A lot of it is using a cost base that is 3, 4, 5 years old. And so before I start giving guidance to the market around what I think that cost base is, given that it's current some of it is currently not in our development plans. I want to make sure that we're clear on that. Some of it's in, some of it's not, and we just need I need to make sure that the costs are up to date.
Yes, it seems rather I think obviously the upgrade to 3,000,000 tonnes from Scarborough going through Pluto 1, we're not using that anyway. I guess my other question is there's news in the papers on Monday that Brookfield pulled out of bidding with you for Chevron's stake in Northwest Shelf. And I'm just curious, I guess to go it alone on this one, what's the end game after the Chevron stake? I mean, did you mop up a shell on BP? And what's the sort of game theory around how that will enable you to enable the projects to go through browse more easily?
Yes. Look, Dan, I'm not sure what rag you're reading, but it's not one that I'm reading. So I didn't pick well, obviously it's not something I take a lot of interest in. And I'm not going to speculate who is in or who is out of a venture with us. As Sherry alluded to, we've been working hard to create relationships with infrastructure investors over the last few months.
Those conversations are quite mature at this point. And we're not going to speculate on whether I'm involved in the Chevron process or not.
Look, my phone is cutting in and out. I can barely hear you. So I might just leave it there. Thank you.
Thanks, Darren.
Next question from Baden Moore from Goldman Sachs.
Hi, Woodside. I was wondering if you could help on just looking at forward liquidity numbers, Sherry. Is there any improvement in your cash tax outlook that we could be factoring in or upside risk from the federal budget that might be washing through in the forward numbers? And then just on your dividend slide and Slide 53, I was just wondering what you're potentially signaling there. One read could be that you're indicating you're not being rewarded for the higher payout ratio you have on your underlying earnings?
And is that what you're signaling where we're more likely to fall back to the sort of state of policy of 50% going forward?
Okay. Thanks for both of those questions, Baden. On the first one, I think the key thing to look out for as we look at the government incentive programs is really around accelerated depreciation on upcoming projects. Now you're probably aware that that doesn't go all the way out through the investment horizon, in particular of our Scarborough and Pluto project, but it could impact some of our near term projects that are being completed over the next 1 to 2 years, and we'll see if that evolves to have more coverage into future years. And your second question around the dividend, we're simply signaling there that we've had a strong dividend payout again in 2020.
We have always said and that remains the case that the next natural point to look at that again and make sure that's at the right level is when we get to a Scarborough and Pluto FID. And I've talked to you in my capital management slides around all of the different levers that we have to pull, and of course, you're also aware that we've already pulled one of those, which is working very well for us around the dividend reinvestment plan, which has had great uptake really for the last three dividend periods here. So we'll look at it again, along with all of these other things, as we get to Scarborough and Pluto FID next year, and we aim to maintain that balance as high as we can as we go through the investment cycle, thinking of what's best for the shareholder overall. Thanks for that.
Thank you.
Thanks, Madelyn. So the last question from Mark Wiseman at Macquarie.
Yes. Hi, Peter and team, thanks for answering the question. I know you've answered a lot already. Just a really quick one on BP is drilling the Ironbark well over the next couple of months. I was just quite interested to see Woodside not farming into that well before the drilling started.
You're able to just comment on given the implications that they are successful for the Northwest Shelf, how you sort of made that decision?
Well, look, obviously, I'm not going to get into our risking around particular wells. Clearly, it was not a well that fitted into our portfolio or fitted our risk profile. And I'm really not sure that there was that much equity up for sale. So, I think all of those factors came into it. Look, the reality is, if it's successful and we really we wish them all the success, then of course, we'll have an important impact on North West Shelf because it should be a tie in that we can bring in quite readily over the next few years.
Now it's not going to happen next year or the year after, but if you think out in that 5 to 10 year horizon, when there's quite a gap in the North West Shelf Foliage, then a successful well at Ironbark, one that can be commercialized, would be very welcome, through the North West Shelf. And I'm sure the participants would be happy to negotiate an appropriate tolling structure to make that commercially viable. All right, I think that's the last of the questions. Look, thanks everybody today. I know this has been a little different.
Apologies for some of the breaks in kind of the telephone communications. We'll work on that, get the bugs out of that next time. But I hope you enjoyed today's presentation. Clearly, the challenge for us was moving forward and stating the case for LNG, why LNG, why Woodside, how are we going to participate, in the climate challenge that's in front of us. Our priorities are clear it's achieving a Scarborough FID in the second half of next year, it's a sell down of equity in Pluto Train 2 in Sangomar, it's delivering on our Sangomar phase 1 commitments it's really developing and maintaining a robust and resilient hydrocarbon business and it's delivering value throughout that energy transition it's making the right bets at the right time as we go through that transition.
So again, thank you very much today for your participation. We now have a little special video, I hope you're able to stay online to watch. It's NAIDOC week this week. Woodside are a very large supporter of NAIDOC, we put together a small video here together with one of our partners. I would commend the video to you if you've got 3 or 4 minutes to watch it.
Again, thank you very much.
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Our adaption and intimate knowledge of country enabled us to endure climate change, catastrophic droughts and rising sea levels. Always was, always will be acknowledges that 100 of nations and our cultures covered this continent.
All were managing the land, the biggest estate on earth to sustainably provide for their future. Through ingenious land management systems like Fire Stick Farming, they transformed the harshest habitable continent into a land of bounty.
Nanook Week 2020 acknowledges and celebrates that our nation's story didn't begin with documented European contact, whether in 17/70 or 1606, with the arrival of the Dutch on the western coast of the Cape York Peninsula.
The very first footsteps on this continent were those belonging to the to the First Nations peoples.
Their coastal nations watched and interacted with at least 36 contacts made by Europeans prior to 17/70. Many of them resulting in the charting of the northern, western and southern coastlines of their lands and their waters.
For us, this nation's story began at the dawn of time.
NAIDOC 2020 invites all Australians to embrace the true history of this country, a history which dates back 1000 of generations.
It's seeing, hearing, and learning the First Nations' 65,000 plus years of history in this country, which is Australian history.
We want all Australians to celebrate that we have the oldest continuing cultures on the planet and to recognize that our sovereignty was never ceded. Always was, always will be.
Always was, always will be.
Always was, always will be.
Always was. Always will be.
Always was. Always will be.
Always was. Always will be. Always was. Always will be.