Scott Morrison says Matt Kean ‘out of step’ on Narrabri gas project
Scott Morrison has admonished NSW Energy Minister Matt Kean for stating it would be a gamble for Santos to proceed with its Narrabri gas project.
Scott Morrison has admonished NSW Energy Minister Matt Kean for stating it would be a gamble for Santos to proceed with its $3.6bn Narrabri gas project as analysts warned users will probably pay at least $8 a gigajoule for supplies, double a target sought by government adviser Andrew Liveris.
The Independent Planning Commission approved Narrabri on Wednesday, removing the last major hurdle for Santos after a wait of almost four years.
Mr Kean told The Australian ahead of the IPC decision it would still be “a big gamble” for the producer to move ahead with the project given his view that fossil fuels could become stranded assets as investors switched to renewables.
The Prime Minister said Mr Kean’s view was “out of step” given the federal and NSW governments had already agreed to a $2bn gas pact in January to boost supplies to the state.
“If you’re not for gas, you’re not for manufacturing jobs,” Mr Morrison said on Thursday.
“So I’m afraid the minister is a bit out of step with his own government, their own policy, his Premier and indeed the deal that he struck with the federal government, You’ve got to stick to your deals and stick to your word.”
Santos received approval for Narrabri from the Independent Planning Commission on Wednesday with attention now turning to the cost and timing of gas supplies from the development, which could supply more than half the state’s gas needs.
NSW Premier Gladys Berejiklian has indicated the state will tap LNG imports if Narrabri fails to move ahead, to meet a federal government deal to supply an extra 70 petajoules of gas into the east coast domestic market. Still, some big users remain concerned the new supply source will do little to reduce gas prices on the east coast, which they argue places Australian manufacturers at a disadvantage to their international rivals.
Narrabri gas would need to be sold for $8-$10 a gigajoule to achieve an economic return on investment assuming well performance as well as capital and operating costs similar to Queensland coal-seam gas fields, JPMorgan said.
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.
UBS expects Narrabri gas at $8 a gigajoule, but said at a fixed price it may still be attractive to big industrial users and cheaper than LNG imports.
“Our analysis indicates the all-in production cost for Narrabri is about $6.50 a gigajoule ex-plant and gas is sold under contract at $8 a gigajoule. This remains more competitive than the equivalent imported LNG price of $8.90 ex-plant, based on current $US5.5/mmbtu Asian spot LNG prices,” UBS analyst Tom Allen said.
“While Narrabri’s production exceeds the $4-$6 ex-plant gas price industrial buyers are lobbying the government to support with market intervention, we believe Narrabri’s ability to offer a fixed price not linked to international oil prices will be attractive for industrial users.” JPMorgan said gas may not be delivered until 2026 or 2027 given a lengthy appraisal drilling program before Santos takes a final investment decision sometime in 2022.
“While the prospect of a new significant supply source could be a headwind for gas prices, we note that the long-dated nature of the development could mean first gas is not available until 2026-27,” JPMorgan analyst Mark Busuttil said. “Santos have indicated that appraisal drilling could take 12-18 months, suggesting an investment decision will not be made until 2022.”
UBS is more bullish and says Narrabri gas could start production in the second half of 2024, although an appeal to the IPC decision could lead to further delays.
A 12 to 18-month appraisal drilling program would help give the company and investors a more accurate sense of the internal rate of return given the years that have passed since Santos last drilled at Narrabri, Macquarie noted.
“Santos has not drilled at Narrabri for over six years, and uncertainty exists on optimal well designs and locations (we expect break-evens will be higher than in the Surat basin due to the need for horizontal wells),” the broker noted.
Santos owns 80 per cent of Narrabri, with EnergyAustralia the 20 per cent balance.
Santos will also look to sell part of its stake to reduce balance sheet risk, Macquarie said on Thursday.
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