Santos chief executive Kevin Gallagher has breathed new life into the controversial Narrabri coal seam gas project in NSW, signalling a potential early 2020 date for moving ahead with an investment expected to cost more than $3 billion.
Mr Gallagher said the broad recognition of the domestic gas "crisis" on the east coast had turned headwinds into tailwinds for the Narrabri project, which he confirmed at an investor briefing in Sydney will be brought back into Santos's core portfolio.
The elevation of the project has put Santos on a direct collision course with environmental groups and some local farmers that vehemently oppose it, with a protest rally organised for Sunday.
But Mr Gallagher said Santos has addressed "every one" of the concerns raised in the record 23,000 submissions to the environmental impact statement for Narrabri and believes it can manage the issues.
"We're not going away; we believe in this project, we think it is good for New South Wales, we think it is good for the east coast of Australia and I believe ultimately it will be good for Santos shareholders as well," he said in an interview after the briefing. The value of the project has been written down to zero in Santos' books. Related Quotes
May14GMT+1000 (AUS Eastern Standard Time)Nov12Nov175103.04513.145
Last updated: Fri Nov 10 2017 - 4:13:25 PM View full quote Company Profile
Gas and petroleum exploration and the production, treatment and marketing of natural gas, crude oil, condensate, naphtha and liquid petroleum gas; transportation by pipeline of crude oil. www.santos.com
Oil, Gas & Consumable Fuels (101020)
ASIC 007550923
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The news on Narrabri came as Santos reported it had surpassed targets on cost reduction and is successfully bringing down debt as it recovers from being slammed by the oil price crash in 2014-15.
Investors and analysts welcomed the progress on costs, with the cash flow break-even oil price now down at $US32 a barrel for this year, from $US47 at the start of 2016. Average well costs have been slashed by 42 per cent in the Cooper Basin and by 72 per cent at the GLNG venture in Queensland, while net debt is down 40 per cent to $US2.8 billion and tracking to beat the end-2019 target for sub-$US2 billion.
Mr Gallagher said that whatever happened with oil prices, every asset in the portfolio needed to break even on a cash flow basis at $US40 a barrel or lower.
Santos shares, which have rallied more than 60 per cent since July on rising oil prices, closed down 3.2 per cent at $4.625, with JPMorgan analyst Mark Busuttil citing the guidance for a rise in operating costs, and capital expenditure as the likely reason.
Bernstein Research analysts Neil Beveridge described the cost savings in 2017 as "substantial" but said the guidance for 2018 was "disappointing", noting that upstream costs would rise slightly, while output is flat to lower. Production is set to range between 55 million and 60 million barrels of oil equivalent in 2018, from this year's 58 million-60 million BOE, as the decline in output from second-tier assets outstrips growth at GLNG and other core fields.
One portfolio manager also voiced disappointment with the production outlook given the capital that has been sunk into the Cooper Basin and GLNG.
Chief financial officer Anthony Neilson said Santos' core five assets would deliver stable production for the next 10 years, excluding major growth initiatives. Narrabri and two other growth projects, the Barossa-Caldita gas development to supply the Darwin LNG project and an expansion in Papua New Guinea, would add to production next decade.
One positive nearer-term surprise was news that Santos has negotiated with Origin Energy's APLNG venture an arrangement that unlocks more than 300 petajoules of uncontracted gas that Santos holds in shared tenements in eastern Queensland. It will replace higher-cost gas being delivered to GLNG from the Cooper Basin in a cheap-priced contract, allowing Santos to sell the Cooper instead into the southern states where it would fetch higher prices and potentially lead to reserve upgrades in the basin.
Mr Gallagher said the deal – achieved through a pipeline access agreement with APLNG and set to kick in next year – is an example of Santos acting on "latent value-add" opportunities lying in its portfolio that it could exploit, and compared it to bringing on a new development project with little capital investment.
Santos also revealed a deal to buy 20 per cent of exploration licences held by ExxonMobil and Oil Search in Papua New Guinea that will likely hand it a bigger participation in the upcoming expansion of LNG production in PNG.
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