Santos cautions against gas sector intervention
MST Marquee analyst says $4 gas for the domestic market deserved a ‘gold medal for the most stupid comment ever made publicly’.
Santos boss Kevin Gallagher has cautioned the Morrison government against threatened intervention in the gas sector, warning investment and new supply may be jeopardised by introducing new measures.
Canberra is preparing to “strengthen price commitments” as it looks to negotiate a new heads of agreement with Queensland gas exporters including Santos to ensure sufficient supplies at affordable prices are available to the market.
Andrew Liveris, an adviser to the Morrison government, has targeted $4 a gigajoule gas as an achievable target for the east coast market despite producers rejecting it as an unrealistic price, raising concern the government may look to set a price target for gas producers.
Intervention such as “breaking into LNG contracts and redirecting that gas to the domestic market” would have serious implications for sovereign risk and foreign trade agreements, Mr Gallagher said, meaning the government was unlikely to pursue that option.
Meddling on price settings “would kill supply and then you end up with the same situation you were in before,” Mr Gallagher told the Citi Annual Investment Conference on Thursday. “Say if you set the price at $6, you don’t only have the impact on developing new resource but you start to impact LNG import terminals and it becomes difficult when you try and make the price falsely low.”
Scott Morrison has positioned gas as the centrepiece of his economic recovery plan and producers like Santos, which has won planning approval for its controversial Narrabri project in NSW, argue policies must ensure more supplies can be delivered to users to head off a looming supply shortfall. Santos operates the GLNG export project in Queensland.
“From an intervention point of view, I think the government will be very focused on transparency, making the market freer and more liquid to support the manufacturers through the gas led recovery,” Mr Gallagher said. “But I can’t think of one example worldwide where government intervention to try and force a price outcome has ever been successful.”
Gas from Narrabri, should Santos proceed with the project, will likely cost at least $8 a gigajoule or nearly double a target sought by Mr Liveris according to analysts.
Mr Gallagher agreed the $4 target was too ambitious while noting the cost of Narrabri would be much cheaper than the original $3.6bn estimate given phased development and cheaper drilling costs.
“You can talk about false price ceilings but ultimately that kills supply and ultimately you’ll kill the golden goose,” Mr Gallagher said. “I’m not going to comment on the $4 but I do agree it’s ridiculous when you look at the environment that we’re in today and what the price should be. But if you want lower prices, increase supply.”
Frontier Economics managing director Danny Price, who worked on electricity models including the dumped National Energy Guarantee, also criticised Mr Liveris’ $4 target.
“Andrew Liveris has a view it should be $4 which is obviously insane,” Mr Price told the Citi conference. “You can see the government is just winding up on things to do to try and drive more gas into the market to try and reduce prices. Obviously spot prices are down and contract prices are still from all accounts holding up which raises all sorts of questions in the minds of the government I suspect about the level of market power that might exist.”
MST Marquee analyst Mark Samter told clients Mr Liveris’ remarks over $4 gas for the domestic market deserved a gold medal for the most stupid comment ever made publicly.
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