Today, on the front page of the AFR the headline read “Worst deal ever” and referred to the deal struck in 2002 between Woodside Petroleum and its partners in the NW Gas Shelf to supply shipments of LNG to China. The 25 year supply deal did not include any mechanism to adjust the price. The current market price of LNG has increased since 2002 and is now double the contracted price. The chinese buyer and the consortium are now in a dispute as the number of LNG shipments have been fewer than expected, and the Chinese believe that this is intentional.
For procurement professionals and their businesses, the learning from this is that while fix price contracts provide surety of cost, they can lead to uncertainty of supply. Rise and fall mechanisms in supply contracts allow for both suppliers and buyers to manage both supply and pricing risks.
In 2002, John Howard, the then Prime Minister of Australia said, “The deal is the biggest contract Australia’s been involved in since Federation” and there was significant excitement involved in the deal. Since then, costs within in Australia have increased therefore putting pressure on the profit margins and therefore the deal has been called the “Worst Deal Ever” and is no longer a win-win deal.
The deal has another 12 years to run and with costs expected to continue to increase, it will be interesting to see how the two parties manage their contractual obligations.
For more information, see the AFR’s How Woodside did its ‘worst deal ever’.