How Australia committed energy suicide to save one dirty company

It sounds preposterous. Yet it is true. It all started when energy firm, Santos, lied to Australia about its gas reserves for export in 2011, 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.

The rest is history. The third-party gas purchases created an artificial shortage that sent the local gas price from $2Gj to $20Gj, as well as tripling wholesale electricity prices.

This shock to energy prices has hollowed out manufacturing, gutted household budgets and squeezed the margins of every business from Townsville to Adelaide. It is no exaggeration to say that Santos snuck its hand into every wallet in eastern Australia.

To prevent this would have been so easy. All that needed to happen was Santos be forced to stop buying gas that was not already part of its reserves. After all, it had lied that it had enough to fill its export terminal, so should wear the losses for doing so, Credit Suisse wrote at the time:

 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.

But nothing was done, even as GLNG and Santos wrote off billions on its white elephant gas export plant because it was shipping gas so cheaply to Asia that it was losing money, but making up for it via huge prices charged at home for the some gas.

This situation became so preposterous in 2017 that owing to pressure from MB and others the Turnbull Government was forced to apply domestic reservation to Santos and other east coast gas carteliers. In response, the local price slowly halved to $10Gj, still 300-400% higher than historical rates.

Then another opportunity presented itself last year to rectify the problem. With the help of MB, federal senate party, Center Alliance, figured out that we had still had a major gas problem. It demanded tougher domestic reservation from the Morrison Government in return for its support for the $158bn tax cut package.

That deal got done and the subsequent process recommended that the ADGSM should have a price trigger added to it. The chosen benchmark was export net-back of the Japan/Korea Marker,  the pan-Asian spot gas pricing mechanism. That would guarantee that the east coast would always have access to the lowest possible Asian spot prices which today would deliver gas at around $1.50Gj ($3Gj minus liquifaction and shipping) instead of the $10-11Gj that has prevailed since the ADGSM was introduced in 2017.

But, that agreement now appears to be dead. Why? Because good old Santos put forward a competing proposal: that it frack NSW’s Narrabri reserve under domestic reservation instead. This idea then suddenly morphed  into Australia’s “gas-led recovery” pushed by the gas industry-corrupted National Covid Reform Commission.

The problem is, Narrabri gas will be delivered into Sydney and Melbourne at around today’s $10Gj price while Santos is still selling gas into Asia at $3Gj JKM (as well on contracts attached to Brent oil at roughly $6-7Gj).

Hardly a better idea versus the Centre Alliance deal that would crash the spot price to $1.50Gj and thereby crush contract prices as well.

As if that wasn’t enough, the fantastically blessed Santos faced another problem. There is huge local resistance to the Narrabri project. It will produce roughly one million tonnes of cadmium-rich toxic salt in phase one alone. Next come phases two-three, four etc, so on and so forth, each of which will double the number of wells as the last with double the toxic salt to boot.

The only solution will be to bury it with the obvious risk that that poisons the surrounding water table.

Nobody else wants that so the local resistance was so fierce that over the last few years it forced coal seam gas bans and triggered a major inquiry by the NSW Chief Scientist to ensure conditions for safe drilling. It came up with sixteen rules to guarantee that NSW was not poisoned for thousands of years, let alone next year.

This would have added costs for Santos of course. So, through a series of events in the NSW parliament, across all sorts of parties and loyalties, Narrabri was exempted from the bothersome sixteen conditions last week.

Then, on the weekend, we got this news:

The NSW Department of Planning, Industry and Environment backed the oil and gas company’s project on Friday and has now referred it to the Independent Planning Commission for a final assessment.

…Environmental groups including the Nature Conservation Council, farmers and some MPs argued that it would contaminate groundwater, pose risks to threatened species and generate substantial greenhouse gas emissions.

But the planning department found the project was “unlikely” to adversely affect the region’s groundwater resources in the Great Artesian Basin and could be designed to minimise any impact.

You will be pleased to learn that the potential final hurdle of the Independent Planning Commission was nobbled earlier this year:

Planning Minister Rob Stokes said on Saturday that NSW was “open for business” as he announced the snap review of the Independent Planning Commission, the statutory agency responsible for making arm’s-length decisions on state-significant development applications including mining projects.

Terms of reference for the review, which will be overseen by NSW Productivity Commissioner Peter Achterstraat, include “whether it is in the public interest to maintain an Independent Planning Commission” (IPC), and whether changes should be made to the thresholds for referring matters to the IPC.

Lobby group the NSW Minerals Council launched a print, radio and television advertising campaign targeting the “faceless IPC” after it rejected South Korean company Kepco’s $290 million proposal for a coalmine in the Bylong Valley near Mudgee.

Does anyone have any faith at all in the IPC to do anything but rubber stamp Narrabri now?

And so, here we are. The entire east coast will continue to pay much higher prices for its own gas than Asian importers do, only now, those unwholesome profits will be re-invested directly into the potential for a subterranean mushroom cloud to kill all life in NSW. Purely at Santos’ discretion.

Bizarrely for myself, who has always supported the Narrabri project when and if Asian prices made it viable, and under appropriate environmental conditions, I must now resist it.

One failure has piled upon the next to create what is now a community and national interest disaster: market failure has led to regulatory failure which has led to political failure. All to save one dirty, little firm.

That, my friends, is how Straya rolls.

David Llewellyn-Smith
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Comments

  1. robert2013MEMBER

    So Santos is a zombie firm kept alive by government bail outs. I realised just now that zombie creating bail outs are nothing more than the game of mates in action. When they say they are creating or protecting jobs they are actually scratching the backs of the establishment. Their fear of a crash is not a fear for the lives of voters but for their own status. We need a crash desperately.

  2. Always supported under appropriate conditions? Are there any? Pilliga is the largest temperate forest in NSW. An industrial gas field will trash groundwater, carve forest with roads and pipes, threaten species, increase wildfire risk.

    Love that Aussie exceptionalism, running the precautionary principle upside down. The greater the catalogue of obvious 21st century environmental risks, the more we crank up the she’ll-be-right extractive economy.

  3. frag outMEMBER

    Did these projects have any idea what they were doing when they went to market for investors, did they understand the geology, the variables, the amount of first times, unknowns and assumptions around gas, water, well life, etc.

    Did the State government fully understand and appreciate what they were approving, not just of the individual projects with long timescales and geographic reach across qld and their inter-connectedness often fighting for the same gas, duplicate and redundant infrastructure, but also the creation of a vampiric industry the collective projects represented, with arguably net negative consequences for Australia and other national industries

    Did the federal government fully understand the impact the projects would have on industries it oversees, and did it respond adequately to step in and act on it when it realised what was happening.

    Did these projects find a solution for the volumes of concentrated brine from the original project phases produced from the water they extracted (Chinchillian spicy salt anyone?)

    At the end of the day you can always count on industry/business to spin things in a way that are advantageous for them in the same way you can always count on self-interest. Why you think the Governments that enabled that same self-interest to get started and flourish, would now have an awakening and not sanction something as idiotic as an import terminal… yeah no.

  4. PaperRooDogMEMBER

    Corruption from top to bottom and left to right!
    That is the only reason I can come up with as to why Albo is not ripping the LNP a new one. Aussies should be rioting in the streets as this is literally stealing our future & condemning Australia’s slid for another generation.

    • bolstroodMEMBER

      Remember, the ALP are the architects of the Gas Industry legislation
      NSW Labor Ministers Eddie Obeid and Ian MacDonald oversaw the legislation that approved the confiscation of Landholder rights to their properties in the interests of the Frackers.

  5. The Narrabri gas field also has very high CO2 concentrations so its not just the brine issue! Question, is the CO2 going to be compressed and injected into suitable strata or just mostly vented? Narrabri gas probably should be left in the ground as the social costs associated are never monetised otherwise it would most likely be a non commercial resource.

  6. Yep, I still don’t understand why it isn’t economically more palatable for Santos to buy the extra gas it needs to fulfill its obligations abroad – surely that would be cheaper? (Unless the contract specifically states that the gas must be sourced on Strayan soil).

    Something isn’t right here.

    • frag outMEMBER

      Same for all of them, they needed large volume customers to support the projects’ business case for approval (company and govt) whether they had the gas or not. Santos was not alone.

      There are two products being sold by these projects – gas domestically, and LNG internationally. The liquefaction is what makes it viable. Just guessing and could be way off but not hard to imagine the terms of the contract likely stipulate the product being purchased is LNG, of a certain volume (i.e. boatload/cargo), to a certain spec, delivered to a certain location (customer’s preferred LNG import terminal) thereby logistically or legally ruling out any foreign 3rd party gas.

      • DominicMEMBER

        Thanks frag, that all makes sense.

        I just imagined there might be LNG cargoes on the water at any given time available for purchase – a bit like oil cargoes that are owned by traders expecting a price surge at some point, but perhaps not at this stage.

        • The Traveling Wilbur

          If you’re trying to find a large mobile source of freely dispersible natural gas… you came to the right place!