Santos fights back as gas spat escalates
Santos sinks to $US289m half year loss after it was forced to slash the value of its GLNG gas export project in Queensland.
Santos has criticised big manufacturers pushing for unrealistically cheap gas deals and suggested aggrieved users could split some of the risk by joining the South Australian producer in developing new projects to boost supply.
The battle between producers and big industry over high gas tariffs re-emerged this week after the competition regulator said offers in the east coast market for 2021 were not matching the global fall in LNG prices.
However, Santos chief executive Kevin Gallagher said users needed to be realistic about the cost and risk for producers of developing new sources of supply.
“I have often said to manufacturers: ‘if you want to share my upstream risk with me, I’m very happy for you to be a co-investor and you can get your share of the gas at their cost which will bring your blended costs down’,” Mr Gallagher told The Australian after delivering its first-half results.
“But I haven’t had too many who are willing to do that, because they understand this is a high risk business.”
Contract prices have failed to budge from a $8-$10 a gigajoule range, more than double historic prices, despite falls in Asian LNG prices this year and the oil price crash.
The prospect of setting a cap or target on prices to help ease high tariffs for manufacturers, floated by the Morrison government’s National COVID-19 Coordination Commission, could also lead to the industry going backward.
“If you start putting false caps on gas prices that are ill thought out you will kill supply faster than you can ever imagine,” Mr Gallagher said.
Santos slumped to a first-half loss of $US289m ($402m) due to writedowns flagged in July as the oil crash roiled the producer. It will pay an interim dividend at the lower end of a target range due to economic volatility.
The South Australian producer sank to the $US289m loss from a $US388m profit after it was forced to slash the value of its GLNG gas export project in Queensland due to lower oil price assumptions as crude demand cratered from the COVID-19 pandemic.
Santos is still working up the business case for its Dorado oil project in Western Australia and Barossa gas development in northern Australia, but said a suite of conditions would need to be in place to proceed including the oil price outlook and a range of market conditions.
Underlying profit fell 48 per cent to $US212m for the six months to June 30, with sales dipping 16 per cent to $1.668bn.
The company will pay a US2.1c dividend, at the lower end of a 10-30 per cent payout of free cash flow, with the board stating economic uncertainty and the lower oil price environment made it a prudent decision. The payout level will be reviewed again for the final dividend in February.
Crude prices have doubled from record lows recorded in April to trade at $US45 a barrel, but even at those improved levels many projects remain marginal. Producers have responded by lowering their price assumptions, triggering giant writedowns of oil and gas assets, to reflect a collapsing demand outlook with COVID-19 continuing to roil the market.
Santos has a $US45 a barrel forecast for 2020 rising to $US49 in 2021 and gradually recovering to $US62.50 in 2025.
Santos is awaiting a decision on its $3.6bn Narrabri gas project, after the NSW Independent Planning Commission was granted nearly four extra weeks to assess the controversial development while a public comment process will be reopened to consider new material.
Shares in Santos fell 5.3 per cent to $5.57.