Government backs a losing company, and a losing industry

19 February 2020 (IEEFA Australia): Australian energy company Santos which owns the yet to approved government-backed Narrabri gas fields in New South Wales has suffered $6.9 billion in write-offs on Australian coal seam gas (CSG), shale gas and its ill-fated CSG to LNG project at Gladstone in just five years and a further $58 million in write-offs on its Indonesian CSG project, a new IEEFA briefing note has found.

Author Bruce Robertson, LNG/gas analyst with IEEFA says with its annual company results due out tomorrow, Santos should see further asset write-offs as the long-term outlook for oil, and therefore gas, prices weaken.

“ALL UP, SANTOS’ INVESTMENTS IN THE CSG TO LNG INDUSTRY HAVE BEEN A FINANCIAL FAILURE,” says Robertson.

Robertson finds Santos has been unable to fulfill its contractual obligations since its first shipment in 2015 from its Gladstone (GLNG) joint venture in New South Wales, focused on converting coal seam gas into liquefied natural gas (LNG).

“In the first half of 2019, GLNG produced 2.6MT of the targeted 6MT of gas, indicating that it is still not achieving an economic return,” says Robertson.

“GLNG continued to underperform in the latter half of the year.”

In January 2020 the Federal Government struck a deal with the NSW government to unlock 70 petajoules of gas in return for $960 million in federal funding to upgrade its energy grid and invest in emissions reductions initiatives.

“Coincidentally Santos’s proposed Narrabri gas project will produce 70 petajoules of gas, which is equivalent to 60% of the NSW market,” says Robertson.

“THE PROBLEM HERE IS THAT THE NARRABRI GAS PROJECT SUFFERS FROM VERY HIGH PRODUCTION COSTS. This means any gas produced will be expensive gas for Australian consumers, while Santos continues to export our cheap gas overseas.”

Robertson found every year in the period 2014 – 2018 Santos has written down the value of its troubled Narrabri gas field. Write-offs to date total $1.5 billion for a project still yet to receive approval to move to the production phase.

“Producing high cost gas will not bring down the cost of gas for Australian consumers.”

As the price of gas and oil continues to fall globally, so to Santos’ asset values will fall.

Robertson says Santos is likely to be taking further sizeable write-offs on its CSG assets and the Gladstone LNG plants as a result.

“in this context, going ahead with the Narrabri project is simply going ahead with massive wealth destruction.

“AUSTRALIAN CONSUMERS WILL CONTINUE TO SUFFER HIGH COST GAS FOR THE 30 YEAR TIMELINE of the project. And, as the world continues to transition to cheap, deflationary low cost renewables, Australians will most likely wear the cost burden of Narrabri and other Santos’ projects that are in soon to be obsolete in energy production.”

Robertson notes that globally, some oil and gas companies are starting to make serious plans to operate in a carbon constrained world and are transforming their businesses.

“Fugitive emissions from gas are a big problem adding to global warming,” says Robertson.

“To date Santos has only paid lip service to environmental and social governance (ESG) principles.

“It will be interesting to see if its 2019 annual report ushers in a change.”

Read the briefing note Santos Racked Up Nearly $7bn in Unconventional Gas and LNG Losses in 5 Years

Media Contact: Kate Finlayson (kfinlayson@ieefa.org) +61 418 254 237

Author Contact: Bruce Robertson (brobertson@ieefa.org)

About IEEFA: The Institute for Energy Economics and Financial Analysis (IEEFA) conducts research and analyses on financial and economic issues related to energy and the environment. The Institute’s mission is to accelerate the transition to a diverse, sustainable and profitable energy economy. www.ieefa.org