Santos feeling the heat as PM turns up the gas in east coast energy crisis

After being hauled to Canberra for crisis meetings, the east coast gas industry is starting to respond. But Santos is a quandary.

Santos CEO Kevin Gallagher. Picture: Marie Nirme.

After being hauled to Canberra for two gas crisis meetings since the middle of March, and this week suffering the international embarrassment of having export restrictions raised, the east coast gas industry is starting to respond.

The energy market operator has told The Weekend Australian that it is getting ready to narrow its March predictions of a shortage, thanks to new information from suppliers since Malcolm Turnbull called his first emergency meeting on March 15.

And ExxonMobil, the operator of the east coast’s biggest domestic supplier — Bass Strait — has said it will this year match the record gas production it hit in 2016.

But Adelaide’s Santos, which is firmly in the spotlight over the east coast gas crisis as the operator of the Gladstone LNG plant, remains in a quandary. GLNG is the only one of three projects at Gladstone that is taking gas from the domestic market.

And beyond the GLNG venture, the export situation is also not serving Santos well.

Unfortunately, thanks to an uneconomic contract signed to underpin a second train at Gladstone, it appears more than 70 per cent of Santos’s production from the iconic Cooper Basin (where discoveries 50 years ago built the company) is now being sold to the Gladstone LNG plant at well below what could be achieved domestically.

And its GLNG partners, which are said to be buying the gas from Santos at just $3.50 to $4 per gigajoule at current depressed oil prices, are apparently in no mood to help it out of that situation.

The perceptions of an east coast gas market shortage and crisis escalated rapidly on March 8, when the Australian Energy Market Operator warned a looming shortage could threaten power supply.

Despite analysts questioning some of the assumptions, it was this report that spurred action at the highest political level just a week later, with heads of the three export projects at Gladstone and other executives marched to Canberra to explain.

While concerns about price surges on the back of Gladstone exports were previously high, just three months earlier Santos managing director Kevin Gallagher was feeling comfortable telling investors he wanted to maximise third-party gas purchases for GLNG to export more.

“We will also broaden out our commercial effort to consider, if we can do it on appropriate commercial terms, the tolling of third party gas through our (GLNG) facilities because we do have spare capacity,” Mr Gallagher said at the company’s December investor day.

Since then, after the first crisis meeting, the Prime Minister has said he wants to hear how GLNG plans to become a net domestic gas producer, which has probably for now stopped its hunt for more near-term third-party gas.

This week, after announcing he would restrict exports in a shortage, Mr Turnbull said exporters who are not net contributors to the domestic market — and GLNG is the only one on the east coast that is not — would be required to fill any domestic shortfall.

An AEMO spokesman said revised estimates from the industry had been taken and production forecasts would be boosted on the back of that, at least reducing expected shortfalls.

“What that means for the production in projected shortfalls we can’t say yet,” he said.

“We’re still crunching the numbers but we are looking to release something in mid to late May.” ExxonMobil, which operates the east coast’s biggest domestic supplier, the Gippsland Basin joint venture, has committed to maintaining record production levels this year.

“We recognise the concerns raised with respect to gas supply and, accordingly, 2016 was the highest gas production year ever from the Longford Plants, with similar production levels expected in 2017,” an Exxon spokesman said.

The Gippsland Basin joint venture, owned by Exxon and BHP Billiton, is under enforcement investigation from the Australian Competition & Consumer Commission to see if its joint marketing of Bass Strait gas breaches the Competition and Consumer Act now there is a dearth of suppliers to the domestic market.

Exxon has not said whether production will be maintained beyond 2017, but BHP’s head of conventional oil and gas, Geraldine Slattery, in October said there was potential for flat Bass Strait production well into the 2020s.

Despite GLNG being targeted, analysts say there is not likely to be a big financial impact on Santos. In fact, it could be beneficial if Santos can use the crisis to renegotiate the oil-linked Horizon contract.