As Santos reports its profits this week, there is one number you are unlikely to hear from chief Kevin Gallagher: $7 billion. That’s $7 billion in gas losses over five years. Bruce Robertson reports on the government’s penchant for backing a big loss industry, future gas liabilities and the Federal Government’s gas deal with the states.
Santos reports its annual results tomorrow.
There is one figure they will not be highlighting – the nearly $7 billion they have written off their investments in the Coal Seam Gas (CSG) and Liquefied Natural Gas (LNG) facilities at Gladstone in the last 5 years.
In every result since 2014, the company has had to take write-offs on this unsuccessful venture. The write-offs have become so regular that to term them “extraordinary” or “abnormal” would be a misnomer.
Santos should see further asset write-offs in its 2019 result as the long-term outlook for oil, and therefore gas, prices weaken.
The CSG to LNG venture was embarked upon with the great hope of providing cheap gas to Asia and starting an export boom.
For Santos, it has resulted in under-utilised LNG facilities at Gladstone as the CSG fields have failed to produce gas at the rates forecast or at the prices expected.
Santos has two long-term contracts to fulfil out of its Gladstone LNG export plant (GLNG) – a joint venture totalling 7.6MT. Each contract is for 3.8MTPA over 20 years with Petronas and Kogas.
The contracts started in 2015 and 2016 respectively. Santos has not been able to fulfil these obligations as yet.
Government backs loser
All up its investments in the CSG to LNG industry have been a financial failure.
According to the 2014 Santos annual report, GLNG has a capital cost of $21.3bn. As a capital-intensive business, the plant’s economic capacity utilisation rates should be very high, typically above 90%, but Santos has been unable to achieve these levels.
In the first half of 2019, GLNG produced 2.6MT of gas, indicating that it is still not achieving an economic return. On announcing its half year result Santos said: “GLNG remains on track to meet the six million tonne annualised LNG sales run-rate (including LNG volumes redirected to the domestic market) by the end of 2019.” Despite its volumes increasing, GLNG keeps underperforming.
The Government, as witnessed by the recent deal between the Federal and NSW governments, has been backing this losing industry to the hilt.
It is interesting to note that politicians of all persuasions are often quoted as saying it is not their job to pick winners in industry policy. While this is certainly a truism, it is also not a politician’s job to back industries that have a sustained record of wealth destruction.
The CSG to LNG industry in Australia has such a record.
The stated purpose of the deal between the NSW and Federal governments is to bring down the price of gas for consumers in NSW. Santos has committed to supplying the 70PJ from Narrabri to NSW. The 70 PJ of gas is equivalent to 60% of the NSW market.
While it may be true that Santos will supply gas from its Narrabri project to NSW consumers, it will not bring down the price of gas for four reasons:
- Narrabri (Gunnedah) gas is nearly twice the cost of the most expensive developed gas field on the east coast of Australia. Producing high cost gas is no way to bring down the cost of gas.
- Santos will be able to divert cheaper gas to exports while supplying Australian consumers with expensive Narrabri gas.
- There is a cartel of producers on the east coast of Australia that controls the price of gas and ensures that Australians pay well above global parity prices.
- Santos remains significantly short of gas at its export terminals. Santos needs approximately an additional 100PJ of gas to supply its terminals to ensure full production.
The ACCC released yet another report into the gas industry yesterday as part of its on going inquiry into the price fixing occurring in this industry.
Yet again, the regulator found Australian consumers are paying far more than they should be for gas.
While industry is paying $10.50/GJ for gas, the ACCC thinks Australian consumers should be paying less than $7/GJ for contract gas.
The price gouging is poised to continue as the ACCC and our governments are recommending that Australians should get the expensive Narrabri gas while the cheap gas is exported.
The Government, rather than fixing the problem with a full domestic gas reservation policy which would supply Australian consumers with gas from all existing fields at a set price, has vowed to extend the ACCC gas price enquiry.
Australian gas and electricity consumers can take comfort in the fact that they will continue to be fully informed as to just how badly they are being ripped off.
While our government is proffering non-solutions to the gas price problem, it is instructive to look offshore and see what other large oil and gas companies are doing.
Oil and gas companies now responsible for their products
Globally, oil and gas companies are beginning to take responsibility for their products.
Product stewardship is a fundamental concept in capitalism. Car companies, for example, are responsible for their products years after they have sold them. The Takata air bag recalls are a great example of how, even though the cars were sold many years before, car companies took responsibility for fixing the faults.
Oil and gas companies are similarly liable for the emissions that their products cause. This is just beginning to sink in with oil and gas company managements and directors.
In December 2019, Repsol the Spanish oil and gas producer, pledged to become net zero carbon emitter by 2050. It has written off $5.3bn after using a new climate change scenario.
Repsol’s directors clearly recognise that some of their assets may become stranded in future, prohibited to produce in a carbon constrained world.
In February, BP plc pledged to become a net zero carbon emitter by 2050. BP’s pledge not only encompasses emissions from direct activities but the emissions from the burning of its oil in vehicles and its gas in electricity production.
For those with long memories, BP has been here before with its “Beyond Petroleum” slogan, and was a global leader in solar for example. Unfortunately, this vision faded and BP went back to be an oil and gas company.
While details on how BP will achieve its transformed “Beyond Petroleum” position are scarce, the intention has clearly been set at the highest levels in the company.
The big question for investors is whether Santos is moving with the times or whether it is resolutely stuck in the past.
Not recognising that the social environment in which they operate has changed poses a big risk for investors.
Additional research by IEEFA’s Tom Lawson
Investment Analyst, Bruce Robertson, has been a fund manager and professional investor for over 32 years. He has worked with Perpetual Trustees, UBS, Nippon Life Insurance and BT and is an active participant in the national debate on energy issues in Australia.