Memo to Centre Alliance: Santos is a liar

The always evil AFR editorial is at it again:

Encouraging indications that the Narrabri gas project will go ahead by the end of the year despite the obstacles stacked against it shows the right way to fix Australia’s energy crisis. Santos is spending $3 billion developing 850 coal seam gas wells in north-western NSW, and using existing pipelines to send it into the state’s energy markets. The company has pushed the project against shrill protests by city greens and local farmers who ignore the science, which does not suit them. The development could supply half the needs of NSW with competitively priced gas and attract a whole cluster of industries and regional jobs around it – unions have been among its strongest backers.

Meanwhile, the federal government instead has been busy demonstrating the wrong way to tackle energy. It has been talking with the Senate crossbench about turning the personal income tax cuts it took to last month’s election into hostages to bad energy policy.

Also at the paper:

The controversial Narrabri coal seam gas project in NSW is on track to be approved before the end of the year in a move gas company Santos says will take the heat off domestic gas prices.

State and federal government sources have told The Australian Financial Review that the $3 billion project, which has been subject to an unofficial state moratorium on coal seam gas for several years, should get the green light by Christmas.

I support Narrabri development. But even if it is approved it will face a major community backlash and may never be developed. As well, it is not cheap gas. It is expensive at $8Gj out of the ground which will not lower east coast gas prices at all.

As it negotiates gas reservation for tax cuts, Centre Alliance should be aware that we have been exactly here before. It was Santos that was most at fault for lying about its reserves when it built the QLD LNG export facilities in the first place, previously from The Australian:

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.

One very simple solution to the entire gas and electricity debacle is to force STO to use its own reserves for GLNG. Of the three Curtis Island carteliers, STO was most responsible for vacuuming up third party gas as its own reserves failed to meet export volume targets. As Credit Suisse argued in 2017:

■ 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% third party gas – 20–25PJa. APLNG is self-sufficient, but as can be seen the other third party 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 third party 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.

We now know what it costs to not fix it. $15-20bn of energy gouge per annum impacting every business and household on the east coast.

In short, don’t believe a word the AFR editorial or STO tells you.

Houses and Holes

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 fouding 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.

Comments

  1. HadronCollision

    Good on you for keeping this open for public reading

    I hope someone here orone of your media contacts LVO has a line into CA HQ esp those patriots rex and stirling

    Send them this!

  2. Santos will only change when this stuff is on the front pages of newspapers.

    This will be a credible threat to their license to operate and so they’ll sacrifice some of their gouge-profits. Until (unless) that happens, everything else is pretty futile.

  3. DominicMEMBER

    The thing that gets me is: why TF are 3rd parties supplying Santos when they could be making more by supplying the domestic market instead. There is something very wrong about this whole debacle and it has nothing to do with economic rationale, nor free markets.

      • DominicMEMBER

        You must have missed the bit where the Japs are buying the gas at a 30-40% discount to what we pay here.

        I think the Japs are paying $5-6Gj whereas the cost in the domestic market is $9Gj or more.

        My rudimentary grasp of ‘math’ tells me it clearly isn’t more ‘profitable’ to send it abroad.

        In fact, hasn’t there been talk of the Japs sending the gas straight back to us and making a handsome turn?

      • That’s a simplistic model, mate. Point in time focus. You completely overlook anything that happens after that point.

        According to your approach, the landbankers should put al their lots on market tomorrow. Because they will make more sales and profits that way. They would in 2019, no doubt….

        Somehow nobody does that. Certainly nobody if scale in the resources game. Somehow everyone thinks beyond the current moment and looks to have a steady stream of solid profits rather than one year of quick-grab profits.

      • Ah, so it’s not that it’s MORE profitable — it’s just that it’s profitable at the contracted price.

    • Dom,
      if my memory of H&H’s argument is correct the reason domestic prices are so high is because of the level of exports. Reduce them and the domestic price falls.

    • Good question!

      I thought this is happening: Bass Strait gas is extracted by Esso and pumped to Victoria and thieving Santos pumps it all the way to the LNG export terminals in Queensland.

      I have always hated long term LNG contracts. Spot pricing is the way to go.

      I think spot pricing would mean Victorians getting Bass Strait gas for a certain price, NSW residents getting it for a higher price due to long distance gas pumping, and power stations in the northern hemisphere getting gas for a higher price than NSW residents due to the cost of liquefying the gas and transporting it across the ocean.

      Thanks to long term contracts, Japan gets Bass Strait gas for a lower price than Victorians do!

    • Good idea. A great route to getting that new home you always wanted to build but couldn’t afford (yet).

      • Dominic, thanks mate. This is what I came up with, a 10-12 hr burn, made in Canada, and cast iron. It has thermal bricks inside so should last a long time, and I’ll take it to the country when I leave Melb. I’m taking every step to detach myself and my wallet from a corrupt environment. It’ll cost money, but I figure I’ll be way better off over time. At current gas rates it’ll be paid off in probably three years. I can even boil a kettle on this one so elec saving as well.

        https://pivotstove.com.au/catalogue/wood/low-carbon-wood-heaters/neo-wood-heaters-freestanding

    • You’re way ahead of me — i’d love to become more self-sufficient but I have a family so am forced to live in the ‘real’ (consumerist) world for now.

      • I’m the same, but I’m getting a loan for the wood heater and I can pay it off in six months making more changes like adjusting our food shopping, and ride to work plus a few other things. Six months won’t kill me I hope.

      • Thanks Le. It’s just that bit too much for me currently, but when I move it’s got to be the only one, and would fit perfectly into what I want to do in the country. Thanks again.

  4. a domestic gas reserve on the east coast for new projects

    No. Gas reservation is needed on old projects.

    It is amazing that no opinion poll has been conducted after the shock election result on 18 May! The accurate pollsters – and Crosby Dexter correctly predicted the 18 May election result – need to do polling on gas reservation and income tax cuts for the rich.