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The Future of Australian LNG with Santos’ Peter Cleary

A stalwart of the Australian oil and gas industry with 30 years’ experience, Santos Vice President LNG Markets and Eastern Australia Commercial Mr Cleary leads LNG commercial for Santos, and commercial for the Eastern Australia Business Unit. He joined Santos in September 2010 from BP, where he was the President of North West Shelf Australia LNG, the LNG marketing company for the North West Shelf Venture.

Tell us more about the record sales revenue Santos achieved in its fourth quarter report?

Everyone’s focus on the past few weeks has been on external events, but it was very pleasing for Santos to report year-on-year, quarter-on-quarter increases in all key areas. Also, it is very important to demonstrate to the market that we are on track for our GLNG project and that our current projects – Darwin LNG and PNG LNG – are performing strongly. It’s easy to be distracted by the current oil price environment, but the underlying performance of the company in the fourth quarter remains strong and on target.

How has Santos responded to the fall in oil prices, and what is your strategy to cope with the ramifications for the LNG industry?

While we remain bullish on long-term energy demand, the material fall in energy prices means we have had to adjust to a world where the oil price has fallen by 50 per cent in just a few months. I think it is fair to say that the degree and speed of the fall in oil prices has surprised just about everyone – it’s been far deeper than we expected, and faster than I think anyone anticipated.

Companies obviously have to respond, and our response has been swift and fulsome.

We announced last year that we were going to take immediate action in the aftermath of the fall in oil prices and we did – we took $700 million out of our capital budget for this year, which is no mean feat. It is a significant amount of exploration and production activity that we’ve taken out and that is purely in response to the changing external environment. We know that in this industry, we need to be lean and capable of performing profitably in all circumstances, so we took immediate action.

The good news is that the revised capital program doesn’t impact the delivery of the GLNG project. GLNG is 90 per cent complete and remains on track to deliver first LNG in the second half of 2015.

What do you think of a proposal to shift to a commodity pricing scheme to accelerate LNG’s shift away from oil-linked prices?

I’ve got a different view. Somewhere along the way, we will see all commodities shift to a single price-type environment. But it’s more than five years away. It’s not a goal and it’s not something that people are working towards; the market is just going to have to evolve.

Gas is priced individually in countries and regions and is yet to be priced according to supply and demand on a global basis such as oil.

There is less emphasis in the industry on trying to get to a single pricing point because LNG buyers tend to like the distribution of risk when they buy LNG and LNG suppliers may be seeking different objectives such as foundation buyers to secure project FID or a one-off sale of an incremental cargo. The buyers have a great opportunity to not only diversify their sources of supply but also the pricing that applies to their purchases. So there is no great push from the buyers nor the sellers to try and find this magical one single commodity price scheme.

What is happening is that we’re starting to see a growth of the short-term market. A lot of LNG is obviously sold on a long-term contract basis and it will stay the same for years to come. But on the flipside, around 25 per cent of LNG is and is expected to stay in the short-term market, which is traded based on anything up to two years or on a cargo-by-cargo basis.

And those cargoes are priced by negotiation between the buyer and seller. Because it’s short term, it has its own pricing structure. This provides the buyers and the sellers with a great amount of flexibility. They’ve got a long-term supply that they’re assured of and they’re certain of the pricing mechanism attached to those volumes, but then they can sell excess cargoes into the spot market, or buy excess cargoes from the spot market on a basis that reflects the short term LNG supply demand balance. We’ll see a continued use of that market to give buyers and sellers a way to balance their portfolios.

What are your views on the export prospects for Asia and Europe?

Asia is definitely going to be the growth engine for the next 15 years for LNG demand. What we do know is that by 2030 the global population will increase by 1.3 billion to 8.3 billion people and the world will need 50 per cent more energy, according to the International Energy Association. Most of that growth is coming from the Asia Pacific region – particularly from India and China.

Around 15 to 20 years ago, people were placing bets on who would be the first out of China and India to first import LNG. India certainly won that race, but China has surpassed it in volume. India has great potential just by the sheer number of people, but I would say its growth is not going to be as remarkable as China’s has been in the past 15 years.

With Asia Pacific countries’ growth in their per capita GDP comes a demand for energy. A great demand for new energy will come from Asia and a great demand for clean energy, which includes gas, will come from Asia. Gas is going to be required because it’s a cleaner burning fuel with 50 per cent less carbon dioxide emissions than a super critical coal power plant.

Therefore, we see the need for more LNG to be produced and that means new projects, not just the ones being built and those already in production. Asia is already the leader in global LNG demand, and LNG is expected to gain market share meeting 52 per cent of Asia’s gas demand by 2030 compared to today’s 35 per cent. Asia will account for 70 per cent of global LNG demand growth. Today’s figure sits at around 66 per cent.

At the moment, prices are down and demand is weak because of a mild winter in the Northern hemisphere but these are cyclical, short-term events. They don’t take away from the long-term fundamentals. As an Australian LNG producer, we have a good track record of producing LNG; by 2018, we’ll have 18 million tonnes of LNG available.

What should Australian LNG exporters do to capitalise on this boom?

We have to do two things in my view. We must adjust our cost base to remain competitive because there are others out there in the LNG market who want to steal our market share. We must also use the brownfield capability of Australia and add another train or enhance existing capabilities to grow our production base.

Santos’s Darwin LNG is a perfect example of a one-train facility which has space next door for a second train; this is much cheaper than building a greenfield project. Santos is also well-placed in PNG LNG with space to expand.

So while it might be tough going in the short-term for everyone in the business, the long-term fundamentals are there. In Australia, if we can manage our cost base and use our existing infrastructure as a leveraging point, we’ll be in a strong position to supply LNG for the region.

Who would you say are Australia’s main competitors in the LNG global export market?

I think America is going to have its challenges, but there are other potential LNG producers like Mozambique. There’s no doubt that Russia has an enormous natural gas resource and eventually, it’s going to play a more important role in the global LNG market. But obviously when people look at security of supply, they don’t just look at the gas resources, they also look at the geopolitics. That’s why Australia is well-placed. We’re an OECD country and we’re a reliable supplier of gas. However, it doesn’t mean that we can rest on our laurels; we have to be strongly competitive against these new LNG sources.

The Federal Government’s energy white paper has been postponed to a yet-to-be-named time in 2015. What does Santos wish to see in this paper that was originally established to review regulatory inefficiencies?

There’s a few things I don’t wish to see in the paper. A domestic gas reservation policy is not a solution to the rising gas prices (a position also held in the Energy Green Paper). Reserving gas will not make it cheaper or quicker to develop – it will discourage the investment needed to make new supply available. Australian businesses and households need energy security and access to affordable gas. The only way to do this is to have the right policies in place that encourage, not hinder the development of natural gas.

Australia doesn’t need more regulation and not more moratoriums. In a low oil price environment, this industry is doing it tough so if you add cost, regulation and duplication you’re only going to make it harder to extract gas out of the ground.

We’ve had a few knee-jerk reactions to gas developments. Queensland and South Australia are two examples of states that are regulating the gas industry well. There is strong, targeted regulation in those two states but also significant political encouragement of our activities. It would be helpful if the white paper recognises existing best practice.

Santos has major gas plans for NSW, including the Narrabri Gas Project. Why is it so imperative that the NSW Government addresses the political impasse on gas exploration and production in the state?

Santos’ proposed Narrabri Gas Project has the potential to deliver up to half of the state’s natural gas needs. The gas produced will flow south through a new dedicated pipeline that will connect to the existing Moomba to Sydney Pipeline and deliver the gas to the domestic NSW market.

NSW is the only mainland Australian state that does not have a material natural gas industry, currently importing 97 per cent of natural gas requirements.

NSW has the ability to become self-sufficient in its natural gas requirements for decades if we take this important opportunity to develop existing natural gas reserves. Failing to develop the reserves in the Narrabri area will result in a less secure energy supply as well as much higher and more volatile natural gas prices for NSW families and businesses in the future.

What is your outlook for future LNG exports and how long do you think oil prices will affect them?

What is important to remember is that when we talk about LNG projects, we are talking about long-term projects with 20-30 year life cycles. Contracts are also written to ensure that the projects can ride the ups and downs in the oil price.

With all of the LNG projects we’re involved in, we’ll weather the storm and create opportunities when the price environment is more favourable. That’s just part of the business. We will definitely be looking at where the future opportunities are. We’re not looking to race to the next LNG project tomorrow – our focus is on getting GLNG up and running. That’s the most important thing that will have our undivided attention.

With the platform of Darwin, PNG LNG and GLNG, we are well set up for future growth. They are great platforms for the company to develop an even bigger LNG business in the future.

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