Santos suddenly endorses gas domestic reservation

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Pardon me while I puke. From Santos boss Kevin Gallagher today:

Gas users and trade unions have expressed concern that Territory gas might simply flow out of Gladstone as LNG, with no benefit for domestic gas users.

A blanket reservation policy would render development of the NT’s shale gas resource uneconomic, since it would prevent the achievement of scale that only an LNG industry can provide to justify the large capital investment required to extract the gas and bring it to market.

However, industry should be open to discussions with governments, gas users, unions and communities about sensible ways to reserve an agreed portion of NT gas for the domestic market.

Some will say that this is a retreat by the industry, but it is a necessary step on the journey we need to take to rebuild trust in our industry as part of a longer-term strategy to better engage with the Australian community.

Too right. The problem is NT gas is not cheap enough to make a difference. We need reservation applied to past reserves on the east coat. One reason we don’t have it is Santos told us we didn’t need it when it built its LNG white elephant on Curtis Island:

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.

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David Knox is long gone with his ill-gotten gains. But the entire east coast economy is left with the legacy of his lies as:

  • gas prices have spiked from $3Gj to $8-10Gj (down from $20Gj last year);
  • because gas sets the marginal cost in the National Electricity Market (NEM), STO is directly responsible for soaring power costs as well;
  • which has completely derailed Australia’s energy sector decarbonisation plan, and
  • the over-investment has also caused Asian LNG prices to collapse as STO is ships our cheapest gas to competitors across Asia at huge all-in cost losses.

STO is right. We need east coast gas reservation but it should apply to 10% of current volumes. If the cartel won’t play ball make it fixed price quotas.

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They are clearly feeling the heat. This is a high stakes gambit that could easily turn into a border reservation argument than STO envisages. But then, looking a bit flexible today is likely to make FIRB feel more comfortable about the takeover bid that is heating up, at the AFR:

China Inc has inadvertently announced that Harbour Energy’s due diligence on Santos is over and that the long-flagged bid for South Australia’s legacy gas company is now locked and loaded.

First thing on Tuesday morning, Santos’ biggest individual shareholder, the Shanghai listed ENN Ecologicial Holdings, went into a trading halt on its local bourse citing “preliminary agreement” on the share transfer deal that will deliver Harbour upwards of 15 per cent of its Australia target.

ENN owns 10.31 per cent of Santos and it sits in “strategic relationship” with Santos’ original Chinese saviour, private equity firm Hony Partners, which speaks for another 4.8 per cent.

Are we really going to sell the core assets of the great gas cartel gouge to foreign interests, further complicating the need for broad reservation?

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About the author
David Llewellyn-Smith is Chief Strategist at the MB Fund and MB Super. David is the founding publisher and editor of MacroBusiness and was the founding publisher and global economy editor of The Diplomat, the Asia Pacific’s leading geo-politics and economics portal. He is also a former gold trader and economic commentator at The Sydney Morning Herald, The Age, the ABC and Business Spectator. He is the co-author of The Great Crash of 2008 with Ross Garnaut and was the editor of the second Garnaut Climate Change Review.