The halving of oil prices over the second half of 2014 has slashed the revenues Santos and its GLNG partners can expect to receive from initial exports, given LNG prices are directly linked to crude prices. JPMorgan energy analysts this month cited likely rates of return from GLNG at just about 6 per cent at current oil prices, about half the hurdle return rates typically used in the industry.

"If the price stayed at $US50 that would be right, but I don't believe and I don't think our investors believe the price will stay at $US50," Knox says in response.

"Oil prices go up, and they go down. Right now we're at a low point, but ultimately the final economics and returns of this project will depend on what the oil price is over the next 20 years, and I will continue to argue quite strongly that the demand for energy is such that particularly gas has a really important role to play."

Knox says the GLNG project will be "comfortably cash flow positive right down to $US40" a barrel, some 20 per cent below current crude oil prices. Santos, meanwhile, with still $2 billion in liquidity is set to be cash flow positive in 2016 even without any oil price recovery, after slashing capex and operating costs. Another 200 jobs were cut from the eastern Australian business earlier this week, on top of the 565 that were announced in August.

Santos CEO David Knox arrives at the ferry terminal prior to the first cargo leaving from GLNG. Robert Shakespeare

The Santos share price, which traded at over $14 in July last year, is now around $5.30.

"We have been caught in this situation of falling oil prices and falling exchange rates," Knox said. "That's the reality of the situation but we've got very strong fundamentals."

Knox's history with Santos dates back from two weeks before the GLNG project was officially announced in September 2007, a venture that crystallised a few months later with the $US2.5 billion sale of a 40 per cent stake in the venture to Malaysia's national oil company Petronas.


The strategic goal was for Santos to gain exposure to the growing, higher-priced Asian gas market for its large resources of coal seam gas, by turning that gas extracted from coal seams into liquefied form, for export to utilities in Korea and elsewhere. The concept of using CSG for LNG was untested, and Santos, the venture operator, was unknown in tight Asian gas trading circles. Its reputation was as a local gas producer in eastern Australia.

On the gas supply side, the challenge was "audacious," says Santos vice president Queensland, Trevor Brown – to use hundreds of relatively low flow-rate wells such as CSG wells to supply a high-rate LNG plant. While GLNG is using 600 wells at the moment, the venture will drill up to 200 more each year over its project life. About 4600 wells are expected to be drilled over the 20 years of the foundation LNG sales contracts, over an area three times the size of Luxembourg. All field operations and the 420-km pipeline transporting the gas to Gladstone are controlled remotely from a high-tech operations centre in Brisbane.

The CSG wells at Fairview and Roma in the Surat Basin have lived up to expectations, says Brown, while vice president Downstream GLNG Rod Duke points to a major achievement in getting the "lean" – lower-energy LNG derived from CSG –accepted in the premium LNG markets of north Asia.

"Lean LNG is the new black," Duke says, noting that the GLNG venture sold 13 "commissioning cargoes" to buyers late last year at "very good prices" as well as another five more recently into a well-bid tender, with some shipments due to go to the Middle East and India.

Since the GLNG venture and the two other Queensland LNG ventures were conceived up to eight years ago, plenty of industry leaders have voiced doubts on the concept, most notably former Woodside Petroleum boss Don Voelte.

Still, Knox takes satisfaction in what Santos has achieved.

"Some of the noise you hear about coal seam gas can't be done, well it's cleary wrong, and always was," he says, while acknowledging that some consolidation between the ventures would have made economic sense.

He also takes issue with critics that say Australia is sacrificing a competitive edge by exporting its gas overseas rather than supplying industrial users with cheaper gas at home.


"Had we not done this project this gas would still be in the ground, it wouldn't be going anywhere and we'd have a really dull domestic market," he says, arguing that the birth of exports from Queensland has actually been of benefit to the domestic market, by stimulating demand, bringing in skills and innovation and helping drive down the costs of production for the local market.

"Queensland has all of a sudden now got a new string to its bow, it's now an LNG player," Knox says.

"For Australia, what it means for the economy is long-term, stable revenue streams and ultimately it means quality jobs. And if we're able to create those things, and ultimately – unfortunately not today but ultimately – create real wealth and value for our shareholders then that has to be a success.

"That last thing – wealth and value for shareholders – is going to come as we see the oil price pick up again over the next period."

The writer travelled to Gladstone as a guest of Santos.