An MB reader has sent this excellent proposal for resolving the East Coast gas crisis by shutting down GLNG without creating sovereign risk.
There’s a possible win/win/win scenario that could be negotiated
Suitors for GLNG take a look at the books and run—I think the contingency liability not currently sitting on the Santos balance sheet for future LNG shortfall costs relating to their inability to meet Kogas and Petronas LNG supply volumes is the most likely reason.
These contingent liabilities could be many billions, depending on the exact recourse in these contracts.
In other words, at some point, unless something changes, GLNG becomes a massive real liability for Santos and other shareholders.
But the LNG long-term market is very liquid at the moment—huge new projects are seeking buyers. So there is no reason why Kogas and Petronas right now couldn’t discretely tender in the international LNG market for cargoes that exactly replace their future contracted deliveries for GLNG, AND they could probably do it cheaper anyway than their existing GLNG contract price—this is the first win.
But they won’t/can’t do this at the moment because they don’t have visibility on what cargoes they will get from GLNG in the future—government policy will impact this.
How do you get Kogas and Petronas to buy replacement cargoes and then wind down GLNG?
The government gets in the room and tells the GLNG JV partners that they will completely block GLNG from using any third-party gas from a certain date (or some other trigger they can use), say 3 months.
This would be a government intervention force majeure event under the GLNG LNG contracts with Kogas and Petronas, which changes everything. For Santos, that would remove the contingent liability risk—the second win.
For Kogas and Petronas, it removes the barrier to recontracting this LNG in the term LNG market—the buyers can be given certainty on what LNG they will get from GLNG, which likely drops fairly quickly to zero.
So it plays out. If Kogas and Petronas do recontract, then they can simply agree with GLNG to amend the LNG contracts. The third win.
The govt does block GLNG access to third-party gas if necessary; a significant volume of gas finds its way back into the domestic market (this would have to be coordinated somewhat unfortunately to not absolutely destroy small gas producers as the price crashes) as GLNG shuts down. The fourth win.
There is no sovereign risk issue, as the buyers chose this path. Santos gets away with things to some extent, but ultimately domestic prices should decouple somewhat from LNG netback (recognising other actions are probably required to ensure it remains this way). The fifth win.
TotalEnergies doesn’t get much from the deal, but similar to Santos, they no longer have a contingent liability sitting out there, and they can exit with dignity, which for them has been a horror story project. The sixth win.
If Kogas and Petronas don’t recontract alternative LNG, the government blocks third-party gas purchases. No sovereign risk can be claimed, as buyers were fully aware this would happen and chose not to act to replace cargoes, so that’s their choice.
Force majeure comes into play, and gas still gets tipped back domestically.
