‘Biblical’ time frames to get projects over the line not conducive to cheap gas, Santos’s Kevin Gallagher says
Santos boss Kevin Gallagher says drawn out development processes for energy projects are getting in the way of supplying affordable gas to Australian consumers and businesses.
You can have cheap gas, or approval timelines which drag on for years, but not both, Santos managing director Kevin Gallagher said, as the company prepares to start a two year drilling program at its Narrabri gas project in New South Wales.
Speaking as the company reported an 60 per cent drop in underlying profit to $US287m, Mr Gallagher said the company had a lot to be proud of, following a year in which the oil price at one stage tumbled into negative territory.
As a result of a cost-out process which has been under way since Mr Gallagher started as managing director in 2016, the company did not lose a single employee as a result of COVID-19 impacts he said, and in December repaid all of the $4 million in JobKeeper payments it had received.
In its results presentation, the company presented a stark comparison with its 2016 results, saying that it generated an extra $US500 million in free cash flow in 2020 at similar oil prices, compared with the result four years previous.
“The improvements in our base business in recent years were perfectly illustrated in 2020 with an average realised oil price of $US47 per barrel generating more than three times the free cash flow as generated in 2016 at a similar average oil price, Mr Gallagher said.
“2020 saw us ride through the bottom of the cycle while still generating free cash flow under a sustainable and disciplined operating model.
“As prices and demand recover, our projects are much better placed than those of our competitor countries.
“Our strongly cash-generative base business and diversified portfolio means that we are well positioned to drive free cash flow as commodity prices recover.”
Previously announced writedowns, primarily due to lower oil price assumptions, pushed the full year result negative for the first time in two years, with a net loss of $US357m recorded against a $US674m profit for 2019.
Earlier this week, Santos announced a total pre-tax annual impairment of $US895m ($1.15bn), with most of that being due to oil price forecasts and a $US98m downwards revision of the Reindeer gas field in Western Australia.
Among Santos’s major development programs this year is planning for the start of a two year appraisal drilling program at the Narrabri gas project, which the company received environmental approval for in November last year.
Mr Gallagher said the company had been working on securing approvals for the project - acquired in 2011 - for many years, which was not conducive to being able to deliver cheap gas into the Australian market.
“It probably feels like a project we’ve been talking about in biblical time frames,’’ he said.
“The reality is, if you want to get gas prices down, you can’t ask producers to spend big dollars tens, sometimes hundreds of millions of dollars, and have to wait a decade before they get a return.
That will not drive gas prices down. This is something that we need to tackle here in Australia, speeding up the approvals for low-risk projects, safe projects, and projects that create jobs.
I don’t know how you’re going to stimulate an economy if you can’t get projects approved.’’
Mr Gallagher said there was a legal challenge to the Narrabri approval, and the company had come to expect such a reaction to projects such as this in NSW and nationally.
The company also supplied further detail about its plan to reduce emissions to net zero on a scope one and two basis by 2040, and Mr Gallagher said activists such as Market Forces, who have been campaigning for the company to effectively shut itself down in recent years, were out of step.
For the past few years Santos has addressed resolutions which activists have, occasionally successfully, attempted to bring to a vote at the company’s annual meetings, which call on it to wind down its fossil fuel activities.
Mr Gallagher said the company’s Moomba carbon capture and storage (CCS) project was investment-ready, subject to a favourable policy trigger from the Federal Government, and the company had a hydrogen strategy which would position it for the next phase of world energy demand.
Mr Gallagher said the activists should be honest that their agenda was simply “anti-fossil fuels’’.
“We are doing the right thing, we are driving change,. Where they need to focus their efforts is actually on governments and customers, to change the products that they want to buy, the fuels that they want to use.
“There’s no point in trying to shut us down while all the customers still need gas. That doesn’t help anybody, that just puts Australian jobs overseas, because that gas will come from overseas fields instead of Australian fields.
“It’s naive to think China, Japan are going to stop buying gas when they’ve got gas-fired power plants all over the country.’’
Mr Gallagher said when buyers shifted strongly to hydrogen, producers could then economically move in that direction.
Mr Gallagher said the company’s Cooper Basin gas fields, which can be used for CCS but also have good solar and wind resources, were “perfectly positioned’’ to supply emissions-free hydrogen.
The company, he said, has decades worth of gas which can be stripped of carbon to be stored in depleted gas reservoirs, producing hydrogen for use as a fuel, “At a much lower cost of production than I’ve seen being presented by anyone else currently.’’.
On the development from the company’s Barossa LNG project, which will feed into the Darwin LNG facilities, is on track for a final investment decision in the first half of 2021.
“In December we signed a long-term LNG-offtake agreement with Mitsubishi for 1.5 million tonnes per annum of Santos equity LNG and executed agreements to transport and process Barossa gas through the Darwin LNG facilities,’’ Mr Gallagher said.
“All required consents and approvals are now in place for our selldown of 25 per cent interests in Bayu-Undan and Darwin LNG to SK E&S, which is now binding and subject only to final investment decision.
“We also continue to progress the binding sale and purchase agreement with JERA for the sale of a 12.5 per cent interest in Barossa.’’
The Dorado oil project off the WA coast had also made “significant progress’’ and Santos aims “to take a FEED (front end engineering and design)-entry decision in the first half of 2021, while also advancing plans to drill the Apus and Pavo prospects in 2021-22’’.
In its annual report, also released on Thursday, it was reported that Mr Gallagher took home $8.1m in “realised” remuneration, including an $887,749 incentive for 2020 and deferred incentives from 2018 and 2017.
His statutory remuneration, excluding deferred payments, came in at $US4.2m.
Overall, Santos reported record annual production of 89 million barrels of oil equivalent (mmboe) and sales volumes of 107 mmboe.
Guidance for 2021 is for production of 84-91mmboe and sales of 98-105mmboe.
Base capital expenditure is forecast to be $US900m while major growth spending will come in at $US700m.
Shareholders will receive a final dividend of US5c per share fully-franked, in line with the final dividend the previous year. The full year payout has fallen from $US11c to $US7.1c.
The business reported free cash flow of $US740m, down 35 per cent on 2019.
The company’s annual meeting will be held in May.