Santos seeks LNG to shore up supplies as its deal with Origin is approaching its expiry

Santos’ LNG facility is seeking short-term gas supply deals due to the looming expiry of a contract with Australia Pacific LNG, which is part owned by Origin Energy.

Santos chief executive Kevin Gallagher. Picture: AAP

Santos’ LNG facility is seeking short-term gas supply deals because its contract with Origin Energy is due to expire.

The expiration of the contract with Origin is considered the first part of a supply shortage that Santos and its partners in Gladstone LNG in Queensland must address.

Industry sources said Santos has accelerated approaches for short-term supply as the 10-year deal for 365PJ of gas from Origin expires at the end of May.

Santos will also need to manage a second supply contract with AGL Energy that is due to expire in 2027.

One source familiar with the details said the situation was being complicated by an expected shortage of supply on Australia’s eastern seaboard.

The Australian Energy Market Operator last week said the east coast would experience structural deficits from 2029, and a seasonal issue possibly beginning in 2028.

Theoretically, allowing gas from Origin and AGL could substantially relieve domestic pressure, and the federal government may be tempted to intervene.

But industry sources said that the local market was too small to absorb the supplies.

“The domestic market is not big enough to replace the hundreds of petajoules that Santos takes from APLNG and AGL, even accounting for all the storage capacity,” a source said.

“The reality is Santos will lock in some supplies from Origin and Santos, maybe not in the same volumes. It is either sell to Santos or reduce production levels.

“The impact on Santos is probably going to be on price. They may have to pay more for gas. These contracts were struck in 2015 and the market is substantially different now.”

Striking new deals with Santos, however, will be sensitive.

The looming eastern seaboard shortage would add pressure on domestic manufacturers and households. Manufacturers are unable to switch away from gas and have said their viability would be threatened by higher prices.

A record number of households are already struggling to pay their utility bills and increased gas prices would heighten pressure.

The looming shortage could force NSW and Victoria to have to import LNG to meet domestic demand – which critics insist will inflate domestic prices.

The situation has already prompted calls for restrictions on LNG exports from Queensland, a move vehemently opposed by Australia’s gas industry. They insist curtailing shipments would leave Asian allies, many of whom are dependent on Australia for energy, in the lurch and sour important bilateral ties.

Even restricting shipments would not automatically result in increased, cheaper gas flowing to NSW and Victoria due to infrastructure constraints.

But with struggles to unlock domestic sources of gas, there is heightened pressure on the LNG industry to do more.

Santos is widely believed to have factored in developing eastern seaboard supplies when it approved the $US16bn ($25.5bn) GLNG on Curtis Island in Queensland. It did so without having developed its own gas supplies, unlike Shell and APLNG.

Originally published as Santos seeks LNG to shore up supplies as its deal with Origin is approaching its expiry