Australia in hour of reckoning
The nation’s biggest oil and gas producers face multiple challenges in a major reality check.
Australia’s oil and gas industry has endured a rocky year by any measure. The worst crude crash in a generation shocked some of the sector’s biggest names while shareholder and legal pressure to act on climate concerns escalates.
On the flipside, oil prices have surged beyond $US70 a barrel amid expectations global crude demand may rebound to pre-pandemic levels a year earlier than forecast. LNG spot prices are also on a tear, back near $US12 per million British thermal units with summer heat keeping prices high over the next few months.
Last year’s market ructions were a huge reality check for the industry which was forced to cut spending, slash jobs, hold off on new exploration and pause the development of major new projects.
But after a sustained period of belt tightening to ensure companies could survive a world of sub-$US20 a barrel oil, conditions have improved and given some of the nation’s major players confidence to invest in the next phase of growth.
Santos approved its $4.7bn Barossa gas project in the Northern Territory in March, with production ensuring the Darwin LNG plant remains running as supplies from old fields run out.
Santos gained control of both Barossa and Darwin LNG after snapping up ConocoPhillips’ northern Australia business for $2bn in October 2019, cementing its LNG exposure in addition to stakes it holds in Queensland’s GLNG project and ExxonMobil’s PNG LNG plant in Papua New Guinea.
The Adelaide-based company, headed by Kevin Gallagher, flagged plans to build two new multi-million dollar LNG processing trains in Darwin as part of the federal and Northern Territory governments’ push to turn the Top End capital into a gas processing hub.
The Territory government also revealed it is contemplating introducing a domestic gas reservation policy to ensure more of the benefits of future resources developments remain in the community and to help stimulate a local manufacturing economy.
Santos chief executive Gallagher said the Barossa scheme was the largest oil and gas sector investment in Australia for a decade, noting that the previous one – the $50bn Japanese-led Ichthys LNG project – was also Darwin-based.
Attention has now turned to whether Woodside Petroleum will sanction its $16bn Scarborough project offshore WA before the end of 2021 which will be used to feed an expansion of the producer’s Pluto LNG facility.
Interim boss Meg O’Neill has shrugged off a slew of confronting climate votes and legal actions and talked up both Scarborough and its $5.9bn Sangomar project in Senegal as the two major sources of growth for Woodside.
Analysts have also been agitating for Woodside to process Scarborough through NW Shelf rather than expanding its existing Pluto plant, easing balance sheet pressure and boosting Scarborough’s break-even LNG price given lower NW Shelf tolls.
But the interim Woodside chief explained why it was favouring a Pluto expansion.
“I think it’s a debate between idealism and pragmatism. So in an ideal world you’d say we’ve got infrastructure that’s available and we would need to make some modifications and in an ideal world you’d say let’s go ahead and make those modifications,” Ms O’Neill told The Australian.
“The pragmatist says we have a mature project that’s ready to take a decision with Train 2 and we have a project that hasn’t been technically scoped for North West Shelf and we have a joint venture that’s very difficult to work with commercially. And when we look at the economics for Woodside shareholders, the better return is to go with Pluto.”
Sanctioning Scarborough will be by far the biggest investment in Australia’s oil and gas industry this year but making a decision will partly hinge on who lands the top job at Woodside as its board weighs appointing a successor to long-serving boss Peter Coleman.
External candidates being considered include Shell’s Zoe Yujnovich and BHP’s Geraldine Slattery, but Ms O’Neill is firming in some quarters as favourite for the role.
One candidate out of the race is Santos’s Gallagher, receiving an unusual $6m “once-off growth projects incentive” to deliver the oil and gas giant’s major projects to 2025, in a move designed to keep him out of winning Woodside’s top job.
Australia’s breakneck growth to become the world’s biggest LNG exporter was impressive in its pace, even if delivery and cost control was at times found wanting. But Australia’s hold on the global crown is already teetering.
The US exported more LNG than Australia for the first time on record, marking a major new commodities rival and underscoring heightened competition among producers to win market share with Asian gas buyers.
LNG output from the US jumped to 6.75m tonnes in May spread across 95 cargoes, making it the second largest global exporter behind Qatar and dumping Australia back into third spot, Bloomberg data shows.
With access to cheap gas supplies, the US is starting to deliver on its vast resources. It was responsible for all of the world’s new LNG production in 2020 - delivering 20m tonnes of new output – with the nation now on track to overtake Australia and compete with Qatar as the biggest natural gas exporter in the world.
Japan, China and South Korea account for more than half the world’s LNG consumption and remain the biggest market for Australian producers, with the US looking to muscle in.
Still, Qatar has ambitions to turbocharge its supplies with plans to add an extra 42 per cent of capacity taking its output to 110m tonnes a year.
Qatar Petroleum will add four LNG trains, each with 8.25m tonnes of capacity, equivalent to more than twice the capacity of Australia’s largest export facility, the North West Shelf LNG plant in Western Australia.
Pressures are also accelerating as investors and regulators hike expectations for energy producers to combat climate change.
An extraordinary few days shook the global energy industry, hitting three international giants who are among the nation’s biggest oil and gas producers.
Shell, owner of major Queensland and West Australian LNG projects, was found by a Dutch court partially responsible for climate change and ordered to sharply cut carbon emissions. Exxon, operator of the huge Bass Strait gas fields, reeled as a tiny activist hedge fund won two board seats after shareholders backed its call for management to accelerate efforts to combat global warming.
Chevron, which runs the giant Gorgon and Wheatstone LNG plants in WA, was also hit with a vote to cut emissions released by its customers, known as Scope 3.
Australian producers face a reckoning after the push for greater action on climate and a landmark International Energy Agency report that found no oil or gas fields should be opened up if the world is to reach net-zero emissions by 2050, the Australasian Centre for Corporate Responsibility said.
Woodside faces new carbon constraints on its flagship Pluto LNG project after the West Australian government on Tuesday demanded tougher standards for its expansion but Ms O’Neill said the industry was responding.
“I don’t see it as a watershed moment but I do see it as a significant continuation of the trend that the industry has been on. We as investors in this space need to be doing our part to decarbonise,” she said.
“Successful LNG producers will need to be low cost and low carbon.”
Prices have recovered and projects are being sanctioned again, signalling a recovery in the industry.
Climate pressure, however, is only likely to escalate providing a stern test for long-term fossil fuel projects that can take decades to produce a return.