Some sense today from alien anal-probing victim Resources Minister Matt Canavan:
Resources Minister Matt Canavan has declared gas swap contracts aimed at increasing domestic supplies should be left to the private sector, as he repeats calls for state governments to free up resources to help prevent a looming energy crisis.
Arguing the Coalition wanted more action from the sector to ensure gas security, Senator Canavan said there was “no role for government” in negotiating gas swap agreements that have been promoted by Labor and the Australian Industry Group as a way to address domestic shortages. “It is up to them (private companies) to sign contracts and negotiate agreements; it is up to us as a government to help maintain gas security for Australia and keep the lights on,” Senator Canavan said.
OK, so the good sense is coincidental rather than on purpose but the fact remains that the gas swaps idea is a disaster waiting to happen given local buyers of gas would then be hooked on oil-linked contract prices and exposed to enormous forex and oil price risk. The AIG has continued its track record as the most inept lobby in the country with this idea. Labor is a plain coward on the matter, paralysed by its fear of resources industry blow back.
The answer is much more simple and Santos makes clear that it knows it today:
Santos chief executive Kevin Gallagher will take a tough line when he meets Malcolm Turnbull today, declaring the notion of “net contributor” of LNG a “false construct” encouraged by competitors.
Ahead of a meeting with the Prime Minister and Australia’s leading LNG producers to discuss Australia’s gas crisis, Mr Gallagher told the Sky Business Ticky program that suggestions of government interference, such as a gas reservation, would risk picking “winners and losers” in the market.
“If government decides to intervene because as an industry we are unable to sort this problem, any intervention has to be equitable across all projects,” he said. “In most cases where there is any form of reservation it would be tied to export capacity or sanction capacity. I don’t believe it is the role of government to pick winners and losers … especially in my case with an Australian company.”
Mr Gallagher reiterated that nationally Santos was a “net contributor” to the Australian market, but said the undertaking by its partners was a “false concept” perpetrated to get a competitive advantage.
“It’s a fake construct designed around how much they buy and sell from the market. The misconception is that the companies own the gas. The companies don’t own the gas. We’re given the rights to develop the gas … the gas is owned by the Australian public. All these projects were sanctioned on an export capacity basis. That has not changed.
The point is not who is a net contributor, it is who is able to supply each LNG plant without drawing on third party gas thus tightening the local market. Only one operation fails on that score, the Santos-led GLNG. Moreover, it lied about it during development, to both itself and the Australian people:
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.
Should all of the east coast economy pay for this lie or should Santos and partners? The answer is obvious, via Credit Suisse:
■ Our preferred option is to reclaim the third-party gas currently being exported: Aside from the Horizon contract between GLNG and Santos, there was no evidence in the EIS or FID presentations that more non-indigenous gas was required. As such, one could argue reclaiming what has only been signed due to a scope failure, is equitable. Including the Horizon contract GLNG will be exporting >160PJa of third-party gas in the later part of this decade. Whilst we get less disclosure these days, BG previously said that after an initial 10–20% in the early days (now gone) QCLNG would use ~5%
■ Our preferred option is to reclaim the third-party gas currently being exported: Aside from the Horizon contract between GLNG and Santos, there was no evidence in the EIS or FID presentations that more non-indigenous gas was required. As such, one could argue reclaiming what has only been signed due to a scope failure, is equitable. Including the Horizon contract GLNG will be exporting >160PJa of third-party gas in the later part of this decade. Whilst we get less disclosure these days, BG previously said that after an initial 10–20% in the early days (now gone) QCLNG would use ~5% thirdparty gas – 20–25PJa. APLNG is self-sufficient, but as can be seen the other thirdparty gas would get extremely close to balancing the market. Clearly these things are far better done by mutual agreement from all parties, rather than a political mandate.
■ GLNG loses but can all be compensated? We estimate that, at a US$65/bbl oil price, GLNG as an entity would lose US$447m p.a. of FCF if they could no longer toll thirdparty volumes. Interestingly, if Kogas and Petronas could recontract their offtake on a slope of 12x (doable in the current LNG market) then their losses as an equity partner are all offset (not equally between the two albeit). Santos would see ~50% of its US$134mn net GLNG loss offset if the Horizon contract could move up to a slope of 8x from 6x. The clear loser would be Total. We wonder whether cheap government debt, a la NAIF, could be provided at the (new, lower volume) project level or even to take/fund an equity stake in it? In reality all parties (domestic buyers included) have some culpability in the situation, so a sharing of pain does not seem unreasonable 02 March 2017 Australia and NZ Market daily 31.
Ban third party gas exports plus install “use it or lose it laws” and domestic reservation to ensure sufficient development of resources into the future.
Problem bloody solved.
