There is a very important piece today at The Australian on gas:
As Santos worked toward approving its company-transforming Gladstone LNG project at the start of this decade, managing director David Knox made the sensible statement that he would approve one LNG train, capable of exporting the equivalent of half the east coast’s gas demand, rather than two because the venture did not yet have enough gas for the second.
“You’ve got to be absolutely confident when you sanction trains that you’ve got the full gas supply to meet your contractual obligations that you’ve signed out with the buyers,” Mr Knox told investors in August 2010 when asked why the plan was to sanction just one train first up.
“In order to do it (approve the second train) we need to have absolute confidence ourselves that we’ve got all the molecules in order to fill that second train.”
But in the months ahead, things changed. In January, 2011, the Peter Coates-chaired Santos board approved a $US16 billion plan to go ahead with two LNG trains from the beginning….as a result of the decision and a series of other factors, GLNG last quarter had to buy more than half the gas it exported from other parties.
…In hindsight, assumptions that gave Santos confidence it could find the gas to support two LNG trains, and which were gradually revealed to investors as the project progressed, look more like leaps of faith.
…When GLNG was approved as a two-train project, Mr Knox assuredly answered questions about gas reserves.
“We have plenty of gas,” he told investors. “We have the reserves we require, which is why we’ve not been participating in acquisitions in Queensland of late — we have the reserves, we’re very confident of that.”
But even then, and unbeknown to investors, Santos was planning more domestic gas purchases, from a domestic market where it had wrongly expected prices to stay low. This was revealed in August 2012, after the GLNG budget rose by $US2.5bn to $US18.5bn because, Santos said, of extra drilling and compression requirements.
“At the time of FID (final investment decision), there was a reasonable expectation during the early years that gas would be available in the market at the right price,” Mr Knox said. “However, large volume, long-term east coast gas supply and prices have tightened over the last 18 months, making third-party gas a relatively less attractive gas supply. This is what led to our announcement (that capital spending would increase).” For commercial reasons, Santos had not revealed the volumes of third-party gas needed to feed the second train.
Presentation slides reveal that by then, even with the $US2.5bn of extra spending, third-party purchases had grown from 140 terajoules a day, at FID, to 240 terajoules a day, or 20 per cent of east coast domestic demand.
Santos figured the gas it was taking out of east coast markets would be filled by accelerated production from the Cooper Basin (fuelled by the GLNG supply contract revenue), gas from the Narrabri coal-seam gas project in NSW and helped by the production of shale gas.
Unfortunately, shale drilling did not return hoped-for results, an oil price slump in late 2014 heavily restricted more Cooper Basin drilling and a community backlash, along with regulatory hurdles, stymied Narrabri.
Even before oil prices slumped, Santos revealed its call on domestic gas would be greater than flagged. In a June 2014 presentation slides to an analysts tour of the GLNG facility were told that third party gas would provide between 410 to 570 terajoules of gas per day, or the equivalent of up to half of total east coast domestic demand, even though it was planning to drill 200 to 300 domestic wells a year.
As a result, GLNG, had drilled 769 coal-seam gas wells as of November last year (and presumably connected fewer). This is about a quarter less than the 1000 it had planned to drill by the end of 2015.
Santos and GLNG stuffed up. They got caught up in the LNG bubble and lied to themselves as well as the nation. Time for them not everyone else to wear it.
Ban third party gas exports. Install “use it or lose it” rules and domestic reservation: gas and electricity problems solved short term and long.