Subjective statements by the DPIE economic consultant that “the massive Santos writedowns will have no impact on the perceived benefits” ignore the fact that such large losses are often related to circumstances where a significant corporate misjudgement of internal or external factors has occurred. Santos’ history of misjudgement and poor CSG investment decisions and questionable resource evaluation forecasts, as widely reported in the media, must have an impact on the validity of any forecasts of gas resources, costs and cash flows provided by Santos for the NGP.
Santos has a corporate history of misjudging and forecasting CSG (coal seam gas) reserves volumes (optimistically high) and well drilling and facility construction costs (optimistically low). As a result, Santos has never had enough gas to fill the two LNG trains built for GLNG at Gladstone, and urgently requires more gas to meet contractual LNG commitments.
‘In 2019, the Curtis Island LNG plants were operating below the full capacity of 25.3 million tonnes per annum compared with over 100% of nameplate performance occurring at west coast LNG plants.
According to EnergyQuest, the three Queensland CSG-LNG plants operated at an average 82% capacity in 2018, with the Santos-led GLNG project having already negotiated down its offtake contracts from 7.2Mtpa to 6Mtpa.
‘“Building six LNG trains in Queensland using CSG was bold and visionary but ultimately a bridge too far,” Dr Bethune said.
“Rather than Queensland exports ultimately rising to 25Mtpa, current export levels are likely to be as good as it gets and maintaining these will require drilling an ultimate total addition of more than 18,000 wells.”
According to estimates published by the Queensland Government, 2P CSG reserves peaked in June 2015 at 42,733 petajoules. By June 2018, 2P reserves were down to 35,074PJ, a drop of 7,660PJ after only 3,570 PJ of production.
Should Queensland end up with four LNG trains, Dr Bethune said it would not be a complete disaster[1].’
The material writedowns that Santos has made on its CSG LNG investments[2] are an indicator that its ability to adequately predict resources and costs is open to question.
As Santos proceeds with cost-cutting and manpower reductions, there are implications for the future safe, environmentally sound and economically sustainable development of projects such as the NGP.
| How Santos’ leap of faith became gas supply strife https://www.macrobusiness.com.au/2019/06/santos-lies-again/ |
Two LNG Trains – A bridge too far for Santos
Original article found at: https://www.macrobusiness.com.au/2019/06/santos-lies-again/
As Santos worked toward approving its company-transforming Gladstone LNG project at the start of this decade, managing director David Knox made the sensible statement that he would approve one LNG train, capable of exporting the equivalent of half the east coast’s gas demand, rather than two because the venture did not yet have enough gas for the second.
“You’ve got to be absolutely confident when you sanction trains that you’ve got the full gas supply to meet your contractual obligations that you’ve signed out with the buyers,” Mr Knox told investors in August 2010 when asked why the plan was to sanction just one train first up.
“In order to do it (approve the second train) we need to have absolute confidence ourselves that we’ve got all the molecules in order to fill that second train.”
But in the months ahead, things changed. In January, 2011, the Peter Coates-chaired Santos board approved a $US16 billion plan to go ahead with two LNG trains from the beginning….as a result of the decision and a series of other factors, GLNG last quarter had to buy more than half the gas it exported from other parties.
…In hindsight, assumptions that gave Santos confidence it could find the gas to support two LNG trains, and which were gradually revealed to investors as the project progressed, look more like leaps of faith.
…When GLNG was approved as a two-train project, Mr Knox assuredly answered questions about gas reserves.
“We have plenty of gas,” he told investors. “We have the reserves we require, which is why we’ve not been participating in acquisitions in Queensland of late – we have the reserves, we’re very confident of that.”
But even then, and unbeknown to investors, Santos was planning more domestic gas purchases, from a domestic market where it had wrongly expected prices to stay low. This was revealed in August 2012, after the GLNG budget rose by $US2.5bn to $US18.5bn because, Santos said, of extra drilling and compression requirements.
“At the time of FID (final investment decision), there was a reasonable expectation during the early years that gas would be available in the market at the right price,” Mr Knox said. “However, large volume, long-term east coast gas supply and prices have tightened over the last 18 months, making third-party gas a relatively less attractive gas supply. This is what led to our announcement (that capital spending would increase).” For commercial reasons, Santos had not revealed the volumes of third-party gas needed to feed the second train.
Presentation slides reveal that by then, even with the $US2.5bn of extra spending, third-party purchases had grown from 140 terajoules a day, at FID, to 240 terajoules a day, or 20 per cent of east coast domestic demand.
Santos figured the gas it was taking out of east coast markets would be filled by accelerated production from the Cooper Basin (fuelled by the GLNG supply contract revenue), gas from the Narrabri coal-seam gas project in NSW and helped by the production of shale gas.
Unfortunately, shale drilling did not return hoped-for results, an oil price slump in late 2014 heavily restricted more Cooper Basin drilling and a community backlash, along with regulatory hurdles, stymied Narrabri.
Even before oil prices slumped, Santos revealed its call on domestic gas would be greater than flagged. In a June 2014 presentation slides to an analysts tour of the GLNG facility were told that third party gas would provide between 410 to 570 terajoules of gas per day, or the equivalent of up to half of total east coast domestic demand, even though it was planning to drill 200 to 300 domestic wells a year.
As a result, GLNG, had drilled 769 coal-seam gas wells as of November last year (and presumably connected fewer). This is about a quarter less than the 1000 it had planned to drill by the end of 2015.
Queensland’s CSG-LNG sector faces supply crunch
Potential closure of two LNG trains by 2025 will provide adequate gas for the east coast
Original article found at: https://smallcaps.com.au/not-enough-gas-queensland-csg-lng-sector-faces-supply-crunch/
Not enough gas: Queensland’s CSG-LNG sector faces supply crunch
By Lauren Barrett – February 21, 2019
One third of Queensland’s $84 billion liquified natural gas industry will be on the brink of closure come 2025 due to a shortage of coal seam gas reserves, says consultancy EnergyQuest.
According to a new 130-page report which is set to be released in full next week, the supply concerns stem from an emerging forward reliance for feedstock on gas reserve estimates that could fall well below delivery expectations.
There are currently three LNG projects operating on Curtis Island, off Gladstone, comprising six trains. The projects rely on CSG sourced from Queensland’s Bowen and Surat Basins.
In addition to the majors Shell and Santos (ASX: STO), some smaller companies exploring in these basins include Blue Energy (ASX: BUL) and Comet Ridge (ASX: COI), with Senex Energy (ASX: SXY) actually producing.
Should EnergyQuest’s supply crunch be realised by 2025, output could be cut to four LNG production trains.
The forecast supply deficit could be exacerbated by potential political pressure for Gladstone LNG operators to divert gas to the domestic market, namely New South Wales and Victoria.
Changed market conditions
EnergyQuest’s analysis, which is underpinned by corporate and government drilling data from around 10,000 Queensland CSG wells, would certainly not come as a surprise to many industry spectators.
The simultaneous development of the LNG export projects a few years ago prompted an unprecedented CSG construction boom, as CSG explorers such as Arrow Energy, capitalised on the demand from the LNG developers to feed the massive plants.
When construction of the plants was underway, many analysts warned the LNG operators Shell, Origin Energy and Santos, that they had been too bullish in their reserve estimates.
EnergyQuest chief executive officer Dr Graeme Bethune told Small Caps that market dynamics had changed since that initial criticism over gas supply.
“The LNG operators were hoping there would be enough domestic gas in the market and there would also be significant gas development in NSW and/or unconventional gas discoveries in the Cooper Basin,” he said.
“But, in fact, none of that has really happened and what has happened instead is that reserves in offshore Victoria have declined faster than expected.”
“One of the reasons we expect at least one of the LNG trains to effectively be mothballed is because of the need to divert gas into the sovereign states,” Dr Bethune explained.
LNG plants yet to achieve full capacity
Queensland CSG supplied 25% of east coast demand in 2018, and EnergyQuest anticipates this number to increase.
At present, the LNG plants are already operating below the full capacity of 25.3 million tonnes per annum compared with over 100% of nameplate performance occurring at west coast LNG plants.
According to EnergyQuest, the three Queensland CSG-LNG plants operated at an average 82% capacity in 2018, with the Santos-led GLNG project having already negotiated down its offtake contracts from 7.2Mtpa to 6Mtpa.*
“Building six LNG trains in Queensland using CSG was bold and visionary but ultimately a bridge too far,” Dr Bethune said.
“Rather than Queensland exports ultimately rising to 25Mtpa, current export levels are likely to be as good as it gets and maintaining these will require drilling an ultimate total addition of more than 18,000 wells.”
According to estimates published by the Queensland Government, 2P CSG reserves peaked in June 2015 at 42,733 petajoules. By June 2018, 2P reserves were down to 35,074PJ, a drop of 7,660PJ after only 3,570 PJ of production.
EnergyQuest noted that Arrow Energy’s Surat Basin acreage is the major potential source of uncontracted 2P reserves, but 80% of this is in the least certain category.
Should Queensland end up with four LNG trains, Dr Bethune said it would not be a complete disaster.
“Queensland will still be one of the world’s biggest LNG exporters,” he told Small Caps.
2018 was a record year for LNG exports from the Port of Gladstone totalling 20.58Mt.
[1] https://smallcaps.com.au/not-enough-gas-queensland-csg-lng-sector-faces-supply-crunch/
[2] https://www.michaelwest.com.au/santos-blows-7-billion-in-five-years-and-no-relief-for-gas-customers/
Australian Gas Projects : Facts and Economics 