Australia’s energy future lies at Chalmers’ door with Abu Dhabi’s $30bn Santos takeover tilt
The Middle Eastern capital community under the banner of the Abu Dhabi group is set to make a fortune if it wins control of Santos.
But Australia’s renewables-based energy cost blowout means that there are good arguments that it is in the national interest to accept the bid.
To justify those conflicting remarks, I am going to highlight one of the saddest Australian national stories that I have had to relate. I will tell the story in three short chapters.
Chapter one
Most of our large superannuation funds and banks decided they would put aside the profit motive and play environmental politics and restrict investing in and lending to our carbon-related energy resource companies.
But many found themselves able to justify investing in huge power using global high-technology companies.
Meanwhile, the share prices of stocks such as Santos, without full institutional support, were always below the levels that apply to other industries.
The Middle Eastern bid for Santos is about $US20bn ($30bn), valuing the company 28 per cent above previous market levels. On the surface, it looks generous. But Santos’s average operating cashflow over the past two years was about $US2bn.
An approximate tenfold multiple theoretically enables the bid to be financed entirely by borrowing and still leave a healthy surplus.
This will be boosted when the company increases output by 30 per cent in just over a year as a result of two massive projects coming on stream.
With oil and gas prices strong, we are looking at ridiculously low cashflow multiples for a company in a growth phase.
Sadly, Australian superannuation fund members will see the rewards that should be in their pocket being transferred to the Middle East.
Chapter two
Solar and wind renewables projects in most parts of the world are not working out as planned. In certain areas particularly close to markets, solar does its envisaged job, but a danger is emerging in the solar market.
The pollution levels involved in solar panel construction are very high, and China has suffered that pollution to gain dominance of the market.
As we saw with terbium and other heavy rare earths, China can turn off the tap or substantially increase the price and leave customers hard-hit.
Solar panel production pollution levels in China are high, but China likely will wait until countries such as Australia are locked into solar energy before raising the price. The panels only last about 15 years so must be replaced, and my guess is when renewable time arrives, China will skyrocket the price.
Meanwhile, in Australia, the economics of wind and solar power is being destroyed by the exploding costs of transmission lines. Former top energy executive Ted Woodley has blown the whistle.
Woodley explains that the transmission giants submit low-cost estimates for transmission proposals to deliver the remotely generated solar and wind power to markets. On the basis of those artificially low tenders, the Australian Energy Regulator grants approval, but does not block the tenders when the costs explode.
Woodley lists four projects that tendered at a total of $5bn, but the estimated costs now total $27bn.
Given the original estimates were fiction, the price explosion will not stop at $27bn.
All those extra costs, increased by returns on the higher investment, will have to be paid via power prices and/or subsidies.
Similar cost explosions in renewable energy have taken place around the world, which are driving a swing towards nuclear in some areas.
Australia is one of the last countries to wake up to the fiction, so we are heading towards being one of the highest-cost power nations on the planet.
We will require vast sums to repair the damage. That money will have to come from the Middle East, so we have a vested interest in Middle Eastern capital becoming involved in our energy scene. Rejecting this offer therefore becomes dangerous.
Chapter three
Australia was an important global centre of oil and gas development expertise.
In Australia, and most Western countries, many top people have been hired by Middle Eastern companies, which now not only have the required capital power to rectify the renewables mistakes, but also have the expertise.
Gradually, nations that strongly believe we must reduce our carbon emissions but have suffered in the renewables mess are turning to gas and nuclear as the way forward. We are way behind the game.
And a fascinating part of the Santos operation is, it is a global leader in the storing of carbon in old oil wells and other repository areas.
I doubt whether the sharemarket even takes any notice of that particular expertise. The Middle East will expand it.
Australia will need to make a difficult decision, and the person with that task will be Jim Chalmers.
Hopefully, he will not be caught in an unrealised capital gains mistake trap on this issue. He will need to check on the magnitude of the renewables project cost blowout and whether we will need Middle East capital to develop a different strategy given the absence of our superannuation movement.
I don’t envy Chalmers’s deliberations.
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