Fool me once. Fool me twice. Gas cartel poisons east again

Via Michael West:

Santos has lodged a big report based on false assumptions to push its Narrabri CSG project through regulators. Its independent expert is not independent, nor expert. Michael West investigates.

They thought they could get away with it; that is, lobbing a chunky “independent expert’s report” at one minute to midnight in a bid to win approval to frack for coal seam gas at Narrabri.

It is down to the wire for Santos’s CSG project in NSW. Just one more hurdle. Despite myriad environmental concerns and strident opposition from farmers and the local community, the project got the tick from the NSW environment minister. Note well: *environment minister*.

Final approval rests with the Independent Planning Commission and Santos has endeavoured to game the process by lodging a voluminous “expert” report at the eleventh hour with new claims over the costs for the project, false claims.

The report is a hoax. The gas cartel of Santos, BHP-Exxon, Shell and Origin have kept prices so high they have killed domestic demand for gas.

“The entire basis on which Santos/Acil Allen’s report is written – the claim that there is stable domestic demand – is incorrect,” writes gas analyst Bruce Robertson in a report for IEEFA.

“Domestic demand is falling, despite low prices, and is destined to fall further and faster due to the global gas supply glut and the flattening of international prices.” The graphic below tells the story. If this chart shows “relatively flat demand” then Santos has a funny idea of what constitutes “flat”.

AEMO, Santos

Source: AEMO 2010-2019 and Acil Allen 2020

Robertson, a farmer and analyst at progressive research house IEEFA, has form in picking lies and duds in the energy sector. He exposed the electricity transmission giants in 2014 for claiming demand was rising when it was falling.

When they shamefully changed their story to claim it was “peak demand” that was rising, rather than overall demand, Robertson proved that too was falling.

A couple of years later, when the gas cartel was lobbying to frack the Gloucester region for coal seam gas, Robertson again exposed their “supply cliff” contentions as false. There is no supply cliff, nor was there. Australia has since vaulted Qatar to become the biggest gas exporter in the world.

Now, as the Government and its gas-stacked panel of NCC economic advisers (the “Covid Commission”) are preparing to splash billions in taxpayer money on gas projects as Australia’s “transition fuel” to a renewable energy future, Bruce Robertson has exposed their entire argument as a deception.

The most glaring falsehood in the Acil Allen supplementary submission to the Independent Planning Commission (IPC) which will decide shortly whether to approve the Santos project is that gas demand is not “relatively flat”, it has fallen.

Gas usage in Australia has declined by 21% since 2014. It has fallen because the gas cartel has pushed gas prices so high they have killed demand. Gas usage for electricity generation has dropped by 58% since 2014.

“Narrabri gas is high cost gas to produce, costing $8.50/GJ ($6.40/GJ at the well head plus $2.10/GJ for transmission to Sydney),” says Robertson.

“The current spot gas price is less than half this price at $4.21 in Sydney (as at 21 August 2020). Contract prices are in the range of $8-11/GJ. Santos cannot supply gas to Sydney and make a profit from the proposed Narrabri gas fields at current gas prices.”

Acil Allen has form when it comes to questions over its research and independence.

Oil and gas major Chevron, operator of the Gorgon and Wheatstone LNG projects, dusted off an old report it had commissioned from ACIL Allen Consulting to present to a Senate inquiry investigating tax and royalties. This claimed Chevron’s contribution to government coffers between 2009 and 2040 would be a thumping $338 billion.

Even before Covid and the collapse in the global gas sector, the claims were deemed extravagantly wrong.

Although he did not reject the ACIL report as being old at the time, Chevron’s managing director Nigel Hearn predicted the PRRT payments from Gorgon (now shipping) and Wheatstone (to ship later this year) would be between $60 billion and $140 billion.

It never came to pass. It never will. Now we have Acil Allen backing Santos’s claims that Narrabri’s onshore gas will be cheaper to produce than previously thought. Even if this were true, there is no case for tearing up farmland to produce more gas when there is more than adequate supply.

This supply however is being manipulated to keep domestic gas prices high. The cartel is selling low into foreign LNG markets just to get rid of the supply overhang so they can charge Australian consumers higher prices.

“One of the key reasons the domestic LNG price on the east coast of Australia did not fall as overseas prices fell was that in the last quarter of 2019 and in early 2020, LNG producers collectively sold 18 LNG spot cargoes into international markets at prices substantially below domestic gas price offers,” says Robertson.

These sales are in contravention of the Heads of Agreement set out between LNG producers and the Australian Government, which stipulates that uncontracted gas must first be offered to the domestic market on “competitive market terms” before it is offered to the international market. This has not occurred, and no action has been taken by the government to rectify this.”

“(Energy Minister) Angus Taylor instead brought out his big stick to bring the gas companies into line (it is in fact not a stick but a sack of money to shower them with)”.

Rather than policing the cartel properly, the Government’s solution to this breaking a Heads of Agreement and price fixing has been to give them a bag of money. That the cartel donates via its individual members to the three major parties should be noted.

ACCC chairman Rod Sims has noted a number of times that there are issues in the gas market. There have been umpteen inquiries pass, billions of dollars of losses notched up by the gas majors in their LNG export disaster – losses they are recouping at the expense of Australian customers and taxpayers. It is time Sims and the ACCC take action.

Let’s recall the last time a debate like this was led by Santos:

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.

And the rest is history:

  • crashed Asian prices for Aussie gas;
  • skyrocketing local prices for Aussie gas.

I used to be an enthusiastic supporter of Narrabri gas. But that was before gas cartel lies destroyed the basis for it:

  • removing all sixteen conditions of the NSW chief scientist for safe extraction allowing STO to do whatever it likes with millions of tonnes of carcinogenic salts;
  • project-specific domestic reservation meaning STO will be free to offset more gas from Narrabri with more exports from elsewhere keeping the local market tight and prices high;
  • the structural global glut which will keep Asian prices low and can be accessed through LNG imports adding more competition as well as gas to the local market, and
  • competing renewable energy alternatives that are already cheaper for peak electricity.

Narrabri absolutely should not go ahead.

David Llewellyn-Smith
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Comments

  1. Gas prices got down to around $1.00/GJ in 2014. The CSG fields had ramped up but there were no LNG plants yet. It all ended up in gas fired generation. Yes there is demand that exists at that price that doesn’t exist at higher prices – I’m not sure that is the game changing argument Michael West thinks it is.

      • I went and had a look cause I didn’t think I was lying. Domestic demand was around 500PJ through the 2000s until 2009, went up to 700PJ from there and back down again as per the chart.

        As for your comments about demand being there at $5-6/GJ , I’m pretty sure thats what oil search were offering the market when they wanted to build the pipeline to aus from PNG. Project didn’t get up…

        • Correct Michael. Two things militated against PNG pipeline. One was the rise in demand and price of LNG and second was the discovery of trillions of cubic feet of methane in shallow Queensland coal seams that would not have been commercial as coal alone but would work in a A$5.50/GJ domestic market.

  2. Michael is correct.
    About 15-16 years ago, gas supply from the Cooper Basin had peaked and longterm estimates showed a looming gas supply shortfall. The big plan for east coast gas supply was to build a pipeline from PNG, with gas entering at $1/GJ and costing ~$2-3/GJ to transport down the east coast. Successful CSG appraisal killed that idea and in any case, Exxon and Oil Search realised that they would be mugs to sell the gas at $1/GJ when they could convert it to LNG and sell it for >$10/GJ!
    Domestic gas was then $3.50/GJ, which would not support the development of CSG for domestic sales, but the LNG market was strong.
    Early CSG development proved to be far better than anyone had thought, with wells flowing at over 3 mmcuft per day, compared with flows of ~0.3 mmcuft per day in the Powder River Basin in the USA, where CSG was first developed. Later CSG wells were not as productive, so more wells were needed to deliver gas, lifting costs.
    As CSG fields were developed ahead of commissioning LNG conversion, that gas had to find a home as the wells, once in production, cannot be shut in like conventional wells and reopened when needed. Some gas was stored in depleted reservoirs, but the gas price had to fall to $1/GJ to absorb the ramp-up gas as it flowed into the domestic market. This also had the effect of reducing efforts to find and develop new conventional gas, even though many in the industry saw a gas supply crunch coming once the CSG/LNG projects began exporting LNG, and production from legacy gas fields in the Cooper and Gippsland Basins continued to taper.
    The GFC and now Covid-19 has killed gas demand, but plenty of LNG was developed 10 years ago when LNG was selling on the spot market for US$20/GJ! (at US$100/bbl, contract LNG was sold for ~US$14/GJ)
    Higher domestic energy costs have accelerated the de-industrialisation of the Australian economy, which can also be measured in stable to falling carbon dioxide emissions, as highly energy-intensive manufacturing and processing activities were closed and/or exported. The fact that demand has fallen from the time when gas was $1/GJ in response to gas prices in the $8-$12/GJ is hardly surprising and is economics 101!
    Going forward, conventional gas from the Otway, Cooper and Gippsland Basins is set to decline rapidly in the absence of major new discovery. Time frames for discovery to production can be 5 to 10 years, so we need to look beyond our noses.
    Building out totally renewable/rebuildable energy supply is going to take decades. Throwing in the towel and submitting to importing LNG would just link domestic price even more strongly to the international market when Australia has a lot more potential for conventional gas.
    The Gladstone “cluster” was truly a cluster! Three projects competing against each other for scarce resources of capital, skills and equipment supply, tripicating all aspects of the project, where common port, gas collection, power supply and many more should have been mandated by the Queensland government, which along with the Federal government should also have had an eye on prioritising domestic supplies and so mandated just 12 mt pas of LNG capacity, not the 24 that was build.
    Finally, gas Reserves are not gas supply. It is all very well to have gas in the ground, but if it cannot be developed and delivered to fill the LNG plant fast enough, then GLNG was forced into the domestic market to bu gas so as to protect is multi-billion dollar cluster!

  3. I wonder what gas projects are awaiting ‘approval’ before Christmas by the Fed Govt.
    AGL has their flawed LNG import project at Western Port Bay, Victoria under the microscope after 10,000 public submissions opposed it and Vic Govt public hearings beginning in October with Vic Planning Minister Wynne to decide in December.

    https://www.abc.net.au/news/2020-08-28/agl-floating-gas-mornington-peninsula-environmental-impact/12603832

    Didn’t Sen. Rex Patrick organise a domestic gas reservation scheme inquiry to deliver its report by Feb 2021?

    • At an oil price of US$50/bbl, contracted LNG could be bought for ~$8.10/GJ. That would need to be sold for ~A$10/GJ in the Australian domestic market to be viable after CAPEX and transport costs. which seems more expensive than developing domestic gas fields in the Otway Basin.
      However, I think that a domestic gas price of Ã$6-7/GJ would be required to motivate new field exploration and development, ahead of building out FF consumption, which in any case will take decades to achieve.

  4. PaperRooDogMEMBER

    So many points in the first article that any mainstream journo could beat the government senseless with & yet they never put ScoMo on the spot, though he’ll run and hide & not answer like Dan the Man. No wonder so many people don’t read the MSM anymore

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