Even the cartel-loving AFR can’t come to grips with selling Santos to the UAE.
The strategic rationale for the bid probably revolves around LNG and the bidder’s eagerness to capitalise on the expansive portfolio of projects Santos is developing not only in Australia but also South-East Asia and Alaska.
ADNOC has a minimal track record of operating outside the United Arab Emirates, leaving the Australian government with limited history from which to evaluate a FIRB application. There’s a danger ADNOC could warehouse Australian resources as a means to stop them from competing with other projects in their portfolio…
The deal timing also coincides with Labor’s review of east coast gas policy and therefore presents an opportunity to rectify past shortcomings in domestic gas reservation, such as the failure to impose a reservation back when Santos’ GLNG plant reached a final investment decision in 2011.
The government could demand some concessions in exchange for deal approval, like reserving third-party gas supplies for domestic use instead of renewing export contracts for GLNG, and mandating domestic reservation for future gas developments.
Let’s recall that it was Santos’s decision to add a second train to GLNG that created the gas cartel. 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.
Applying a ban to third-party gas purchases is enough to protect Australia’s interests and is a good start. But there are many ways to juggle portfolios of gas to hide the truth.
Likewise, a reservation that does not blanket the market.
The real question here is whether this transaction could be used to restructure the gas market in such a way that competition returns to drive down prices to local breakevens permanently.
My view is that FIRB should insist that one GLNG train must be divested to the Australian government.
It can be paid for off-book and run as a public corporation.
It can then control the cartel by modulating exports directly when the local market needs more or less gas, and set prices at levels known to be cost-plus, which will force all local gas prices lower.
This same public firm can develop other gas resources on the East Coast as needed.
If there is no restructuring of the failed market, then this transaction is national interest suicide.
