Santos business case put to the test: fails badly

Just days after the announcement by Prime Minister Scott Morrison of a Commonwealth-State “energy deal”, gas industry executives faced tough questioning at the second hearing of the NSW Upper House Inquiry into The implementation of the recommendations contained in the NSW Chief Scientist’s Independent Review of Coal Seam Gas Activities in New South Wales.  

Questions were asked about the economic justification for Santos’ Narrabri Gas Project, which is under assessment by the NSW Government. One of Santos’ pivotal promises is that Narrabri gas will reduce gas prices to the people and industry of NSW. However there is every indication Narrabri gas will do nothing to reduce NSW gas prices or electricity bills. The AEMO cost of $7.25/Gj (some sources are quoting $8.00/Gj) could well put Narrabri into the more-expensive-than-imported-LNG category.

Santos claim in a recent story that Narrabri Gas would cost around $6 gigajoule. It is value destructive for Santos and its shareholders unless the cost of Santos not meeting its future LNG export contract obligations is considered. Why would Santos want to sell $7 gas for $6?

Questions on notice regarding costing of Narrabri gas to Tracey Winters, Strategic Advisor, External Affairs, Santos Limited, at the Inquiry returned this answer “The 2019 AEMO Gas Statement of Opportunities (GSOO) contained a Core Energy estimate of Narrabri production costs at $7.40/Gj. To the best of my knowledge, Santos did not provide data for the calculation of this estimate and the estimate will be updated, using correct data, in the 2020 AEMO GSOO. Santos can confirm that Narrabri gas will be lower cost than Queensland coal seam gas. The cost of Narrabri gas is irrelevant to Santos’ decision to develop the Narrabri Gas Project solely for the domestic market.”

The energy deal between the Commonwealth and NSW sets a target to inject an additional 70 petajoules of gas per year into the NSW market, and agrees to a gas market review if this target is not met by 2022. The price of the 70 petajoules (Pj) announced in a bi-lateral Gas Deal for NSW has never been discussed. So what does the deal mean to the East Coast gas market?

Narrabri is high cost gas and is unlikely to be able to compete with LNG import terminals in NSW (which have their own issues). At the Chief Scientist’s Inquiry, Tracey Winters of Santos scoffed at the idea that re-importing gas via an import terminal could ever be cheaper than Narrabri Gas but indications are that this would be the case. Santos are outspoken critics of LNG import terminals.

Macquarie Wealth Management stated in 2018 “We believe the import terminal could be used as a justification to reject the development of Narrabri, given its political sensitivity.”

Paradoxically, an import terminal in NSW could actually be in Santos best interests – Santos can then send an extra 70 PJ a year (proposed NSW Santos supply) to export LNG. Santos do not appear to be acknowledging this – is this because Santos may have their eye on the prize – the Liverpool Plains?

The best gas is usually under prime agricultural land.

Australian Petroleum Production and Exploration Association: What APPEA said at the Inquiry

APPEA’s statement at the Inquiry that the extra gas wells and development of coal seam gas  industry in Queensland would not have occurred without the East Coast Gas Cartel is specious and relevant only in that it caused an increase in gas prices.

Expansion of Queensland’s coal seam gas industry only occurred because export (LNG) gas prices were much higher than domestic gas prices (see plot below of prices before exports started in 2015). APPEA did however admit that Queensland LNG inevitably linked Australian East Coast gas prices to higher international prices.

APPEA’s assertion that an import terminal would set a floor price on gas in NSW is incorrect and misleading.

An import terminal would set a cap on prices in NSW as it would be an alternative supply source from LNG. That ‘cap’ price would be the price of spot large volume LNG imported through the NSW terminal. Floor prices are set by the most willing seller and the lowest cost of supply – which is hard to predict in a contested market once an import terminal is built, but more likely to be lower with an import terminal than in the absence of alternative supply from an import terminal.

The statement that “more investment in domestic gas will reduce prices” ignores the fact that if the cost of that gas (investment) is above the market (LNG parity) price, it is not economic. APPEA does not understand that the terminal (regasification and storage costs) for LNG at Port Kembla are about the same as the APA pipeline costs to get gas to Sydney, so that imported LNG is price competitive with Queensland or Moomba gas (see plot below).

Where did the “70 Petajoules” come from?

How did Scott Morrison arrive at 70 Petajoules as the amount of gas NSW has to produce under the energy deal? Santos quoted this number frequently at the hearing – and it happens to be the same number as that in the recent Berejiklian/Morrison announcement.

70 Petajoules =70,000 Terajoules =70,000,000 Gigajoules  

Santos has signed multiple MOUs for gas supply to Perdaman (14.5/Pj p.a. over 20 years), Brickworks (3/Pj p.a. over 7 years from 2025) and Weston Energy (10/Pj p.a. over 10 years, beginning no earlier than 2023). In their EIS (Executive Statement), Santos states the project has the potential to supply up to to 200/Tj of gas per day (0.2/Pj) or 73,000/Tj per year or 73Pj.

Below is Santos’ supply statement – note that APA are not proceeding with the construction of this pipeline at this current time.

After many years in an exploration phase and the assessment process lagging far behind time (mainly due to Santos’ refusal to provide information to Government agencies) Narrabri Gas Project is currently a stranded asset with no pipeline to anywhere. It is looking like the Berejiklian Government may recommend a scaled down Narrabri Gas Project drilled on private land with the gas to be used locally. The term “boutique” gas field is being increasingly heard.

Could this “boutique” styling be intended to minimise an inevitable confrontation with community, by portraying the project as a small one with no intentions of expansion? In reality, more than a dozen zombie expired gas licences are still in existence which Santos has an interest and equivalent to an estimated 7% or more of the NSW land mass.

Santos refuse to disclose gas composition data for Narrabri gas.  The quality of the gas could impact further on Santos’ production forecasts and the price of the gas.

Santos: History of bad decisions

Santos has a corporate history of badly misjudging both gas well volumes and drilling costs. As a result, they have never had enough gas to fill the two LNG trains built by Santos in Queensland (GLNG), and desperately need more gas to meet contractual LNG commitments.

Additional (new or imported) gas sold into NSW (or anywhere in the East Coast gas market) simply frees up that volume from Santos’ other sources (South Australia, etc) to be exported as LNG through Santos’ LNG trains on Curtis Island.

Narrabri gas would actually be high-priced gas for NSW, allowing other lower cost gas to be exported. Exporting the cheaper gas means Santos can maximise profits.

The low utilisation of the second LNG train at Gladstone is legendary in Santos’ history of bad decision-making and poor risk appraisal. The building of a two train LNG plant in Queensland by Santos (which has never produced LNG to nameplate capacity) means that Santos has to continually scramble to find gas to meet overly ambitious LNG sales contracts.

The two train decision was underpinned by poor ability to objectively forecast gas production. Reserve and development cost assertions by corporations are rarely believed by banks, which is why Independent Technical Experts are nearly always engaged by lending banks to report on reserves and costs.

Santos’ statements on reserves (volumes) and costs need to always be seen through the prism of major errors in these elements. Provision of reports by a reputable, international reserves expert need to be requested.

This is a pressure Santos would continually feel. A price impact would only occur if all the Queensland LNG trains were full to capacity, forcing additional domestically produced gas into the domestic market. However, the possibility of the Queensland LNG trains ever being full is extremely remote.

Furthermore,  Santos’ statement that “well connection costs have been reduced by 84%” does not address waste treatment, drilling costs and gas processing costs which are the largest cost components. The coal seam gas industry itself consumes 3.2% of the National Energy Market demand to convert coal seam gas to LNG for export. The industry is not big on Energy Return on Energy Invested or (EROI).

The AEMO Electricity Statement of Opportunities 2018 states that the CSG to LNG export industry uses 5,900 Giga Watt Hours. Total National Energy Market (that’s 100% of all energy generated in Australia) electricity consumption is 181.871 GWh. Gladstone LNG exports are 2-3 times the amount of gas that is used domestically in the Eastern and SE States (SA, Vic, NSW, Qld)

Santos’ illusory gas promises are a risk to NSW

Santos’ slogan is “We have the energy”, but it is clear Santos does not have enough energy to fill its contracts. According to Australian energy market consultancy EnergyQuest, the three Queensland CSG to LNG plants operated at an average 82% capacity in 2018.

Santos oversold gas they didn’t have and couldn’t get, they overestimated reserves, they drove the domestic gas price to export parity sending manufacturers to the wall, all the while receiving plenty of government subsidies and paying no tax.

NSW does not need to become another Sacrifice Zone in pursuit of fossil gas for the export or domestic market. NSW would be wise not to allow this industry to proceed. With the known gasification and depressurisation risks to groundwater security as experienced in Queensland, a host of negative economic and social impacts and illusory promises of reduced gas prices that may never eventuate. The people of NSW are likely to be left with legacy rehabilitation costs that will burden taxpayers for generations to come.