Why Shell Could Get Shocked Down Under

Its $5 billion offer for Australia's Woodside Petroleum might fall victim to a populist crusade against globalization

Australia's rugged northwest coast is one of the world's wildest places. Home to mobs of kangaroos, emus, and native Aborigines, it's a remote and unlikely battleground for one of the critical battles in the antiglobalization crusade.

But here, in this sparsely populated tract, a defining struggle between Big Oil and small politics is being played out. Pitting globalization's boosters and their "market rules" mantra against protectionists, the prize is the area's massive North-West Shelf project, with its oil and natural-gas reserves that power many of Asia's biggest companies.


  To the "antiglobo" crusaders, Royal Dutch Shell is the evil, job-stealing foreign vulture swooping down on cheap Australian assets. The battle is shaping up as a critical conflict in the wider globalization debate. Australia's reputation for welcoming foreign investment also may hang in the balance.

The North-West Shelf is operated by Perth-based explorer Woodside Petroleum, now being targeted for takeover by Shell, its major shareholder. As big as Western Europe, the region is believed to contain one of the richest oil and gas deposits in the world. Its potential is so vast that Shell is willing to bet $5 billion to take over Woodside. With cash to burn after rocketing oil prices boosted 2000 earnings 85%, to $13.1 billion, Shell wants Woodside as its prime operating vehicle in the Asia-Pacific region. But local politics threaten the deal.

A month ago, this was a nonissue. A decade of interrupted economic expansion had ushered in extraordinary wealth Down Under. And Shell, which has invested in the country for almost a century, considered itself an exemplary corporate citizen. It had tabled its Woodside "merger" offer last May, figuring the deal's fate would be decided purely by the market. Indeed, Woodside's board said the $7.53-a-share offer wasn't enough, and various market players, like U.S arbitrage fund Davidson Kempner Institutional Partners, were taking big Woodside positions on the assumption that Shell would up the ante.


  In the meantime, however, crucial elections in two of Australia's six states swept the Labor Party to landslide victories. Ironically, the left-leaning Laborites got there with the help of the country's complex "preferential" voting system, which allowed their candidates to benefit from ballots originally cast for a right-wing extremist party, One Nation, which opposes immigration, aboriginal land rights, and takes a decidedly xenophobic view of the world beyond Australia's shores. Since those elections, Australian media have been serving up saturation coverage of just how many iconic Australian assets are actually foreign-owned.

For Prime Minister John Howard, leader of the conservative Liberal Party, the situation is particularly sticky. On Mar. 6, his government, a coalition with the rural-based National Party, was hit by a double whammy: Polls put support for the government at an all-time low of just 30%, and economic statistics confirmed that the country had just experienced its first quarter of recession in 10 years. Now, with a weather eye on a snarling electorate, Howard is vacillating about foreign investment in general, and the North-West Shelf in particular. "You have to listen to your heart. You also have to follow your head and keep the two of them going in the same direction," he says.

That's cold comfort for Shell, with a company spokesman saying it "would be unfortunate if the government seemed willing to sacrifice one of the biggest foreign investments in Australian history because of what might seem political expediency."


  The market doesn't like all this uncertainty, either. The Australian dollar has plunged to near its historic low of $0.507 -- a dive that has had the ironic consequence of making Woodside an even cheaper potential acquisition for the massive Shell.

The real irony is that Woodside isn't really a "fair dinkum" Australian company, as they say Down Under. In fact, it has been mostly foreign-owned since the 1970s. Without the huge investments by Shell, Chevron, and giant Japanese conglomerates Mitsui and Mitsubishi decades ago to develop the Shelf, there might not even be a Woodside. With the threat of a recession looming, turning away one of those big foreign investors now may be the last thing Australia needs.

By Eric Ellis

Edited by Thane Peterson

Before it's here, it's on the Bloomberg Terminal. LEARN MORE