All images: Santos.
BY REUBEN ADAMS
SOLID March quarter results have been tempered by rising tensions over the Turnbull Government’s domestic gas plan.
On 15 March the Turnbull Government held crisis talks with gas industry heavyweights, including Santos, Origin, ExxonMobil and Shell, to address the supply shortages and ballooning prices in eastern markets.
Afterwards, Mr Turnbull called the meeting a success.
“[The] fundamental outcome of the meeting is this: that the producers have given us a guarantee to ensure that gas is available for the national electricity market,” Mr Turnbull said.
“They [the producers] have given us a commitment – a guarantee – that gas will be available to meet peak demand periods in the national electricity market.
“The implementation arrangements are going to be developed with the market bodies and the other industry participants and we’ll be meeting again in a month.”
Two of the east coast LNG exporters, AGLNG and QGCLNG, gave a commitment to become net domestic gas contributors.
The third, Santo-led GLNG, took the matter on notice.
In a subsequent press conference Mr Turnbull was asked if the Government was concerned by the lack of commitment from GLNG.
“We have the ability to control exports,” he said.
“So what we’re seeking from the industry – and they understand the context in which their commitments are being sought – what we’re seeking from them are commitments that ensure that the domestic gas market is well-supplied.”
“That’s fundamental. They understand that. They understand it very well. All of the participants around the table understand it also.”
Santos subsequently made proposals to its partners in the $US18.5 billion GLNG gas export project – including French giant Total SA, Malaysian company Petronas, and Korea Gas Corporation – to increase supplies on the east coast, according to a 24 March article in the Financial Review.
But chief executive Kevin Gallagher said that within GLNG Santos was “just one vote of four, so we’ve got to work with our partners before we can say what we’re going to do”.
“Remember, these guys, along with Santos, have invested billions of dollars building this project,” Mr Gallagher told AFR Weekend.
“We can all have a view on whether that was well spent money or not but the fact is they have invested billions of dollars and they have a right for investment to be protected.”
Mr Gallagher joined a chorus of voices, including the Federal Government, blaming State Government policies for restricting access to onshore gas.
Mr Gallagher told Sky News Business in April there would be no shortage had past projects been put on the pipeline.
“There’s plenty of gas on the east coast and in the Northern Territory, it’s a case of being able to develop it,” he said.
Santo’s $2b Narrabri CSG project, near its namesake town in north-western NSW, could be a crucial to energy security in the medium term.
Santos is proposing up to 850 wells to supply up to 50 per cent of the State’s gas needs for two decades.
Santos submitted the State Significant Development Application and associated Environmental Impact Statement (EIS) for Narrabri to the NSW Department of Planning and Environment on 1 February this year.
Santos would make the gas available to NSW and the east coast domestic market via a pipeline linking into the existing Moomba to Sydney Pipeline.
The $450 million pipeline would be constructed by APA Group and was subject to a separate approval.
Mr Gallagher said Santos had spent time producing a comprehensive EIS so the local Narrabri community and stakeholders could be confident the environment and water would be protected as the project was developed.
“The EIS has concluded the project can proceed safely with minimal and manageable risk to the environment,” Mr Gallagher said.
“The Narrabri Gas Project has the potential to play a significant role in the domestic energy space.
“Natural gas has a vital role to play in delivering energy security, while having the additional benefit of being 50 per cent cleaner than coal resulting in a significant reduction in carbon emissions.
“The development of new natural gas resources is crucial in assisting Australia’s move towards a clean energy future.
“In NSW alone, more than one million homes and 33,000 businesses rely on natural gas as a source of energy.”
The EIS included extensive studies and modelling on the environment in the project area, including on water, flora, fauna, soil, noise, air quality and cultural heritage.
Santos drew upon more than 13,000 hours of on ground environmental surveys, carried out by environmental scientists, and considered potential social impacts through thorough community and stakeholder consultation.
The operations would be on about 1000 hectares in and around the Pilliga near Narrabri. The majority of the project would be on State land in parts of the Pilliga that were set aside by the NSW Government for uses including forestry and extractive industries.
The NSW Government has recognised the project’s importance, declaring it a Strategic Energy Project, estimating the top 500 industrial gas users provided more than 300,000 jobs which rely on an affordable, secure supply of natural gas.
The project could create about 1300 jobs during the initial construction phase and around 200 ongoing jobs, many of which would be locally based.
Over its life, the project could generate around $1.2b in State royalties.
The local community would also benefit from a Gas Community Benefit Fund of up to $120m to support local programs and initiatives.
March Quarter Results
In December 2016 Santos announced its new three phase growth strategy to drive shareholder value – Transform, Build, and Grow – which appeared to be paying dividends after the company posted strong March Quarter results.
Mr Gallagher said the first quarter results was further evidence the Santos turnaround strategy was delivering positive results.
“GLNG produced higher LNG volumes in the first quarter, as strong upstream field performance delivered higher volumes of equity gas to the LNG plant,” he said.
GLNG LNG production increased to 1.4 million tonnes for the quarter as continued strong production from Fairview and improved Roma field performance boosted equity gas supply.
Total first quarter production of 14.8mmboe was down slightly on the previous quarter, primarily due to the sale of the Victorian, Mereenie and Stag assets, partially offset by higher GLNG equity production.
Total sales volumes of 18.6mmboe were lower due to asset sales, lower third-party volumes and the timing of liftings.
“Our costs have again been reduced, we have improved our free cash flow position and our net debt has been lowered,” Mr Gallagher said.
“Our 2017 forecast free cash flow breakeven now stands at US$34 per barrel.
“This is a significant reduction from the $47 per barrel mark at the beginning of 2016.
“Strong free cash flow combined with cash proceeds from asset sales and the Share Purchase Plan enabled us to reduce net debt by US$380 million in the first quarter.
“This is strong progress towards our target of a US$1.5 billion reduction in net debt by the end of 2019.
“We will continue to prioritise free cash flow for debt reduction.”