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Tim Daiss

Tim Daiss

I'm an oil markets analyst, journalist and author that has been working out of the Asia-Pacific region for 12 years. I’ve covered oil, energy markets…

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China Gives Australia’s Number Two Gas Producer A Boost

Good news for Australia’s number two independent gas producer Santos Ltd. keeps rolling in. The company, that as recently as last year was in such financial straits that it had to fend off a A$9.5 billion take-over attempt by private equity-backed Harbour Energy, is making a comeback.

A rebound in oil and gas prices has allowed the Adelaide-based company to slash costs as well as increase profitability. Santos CEO Kevin Gallagher said on Wednesday, February 21, that the company removed substantial costs, generated significant free cash flow and reduced net debt. Santos saw its underlying profit reach US$336 million for 2017, a 433 percent surge year-on-year, the company reported.

“Santos is now a stronger, more resilient company with the capacity to execute and bring on-line growth opportunities across its core long-life natural gas assets,” Gallagher added, while commenting on Santos’ Full 2017 Year Results.

The result includes the previously announced net impairment charge of US$689 million after tax taken in the first half against the GLNG project (US$867 million) and AAL assets (US$149 million), partially offset by a positive net write-back to the Cooper Basin of US$336 million, Santos said. Additional impairment charges of US$14 million after tax were recorded against other assets in the second half. Santos reports its financials in US not Australian dollars.

Price support in Asia

Spot prices for liquefied natural gas (LNG) in the Asia-Pacific region, which represents approximately two-thirds of global LNG demand, posted new three-year highs by the end of 2017, reaching the $11/MMBtu mark and just as important for markets, rose over oil-linked LNG prices. Much of this upward price trend has come amid China’s increased gas usage and LNG imports. Related: What Is The Right Price For Oil In A Balanced Market?

While prices are pulling back from this high price point as winter weather in North Asia subsides, they should still remain above three-year averages as demand growth in Asia continues to gain momentum, even as summer season kicks in with traditionally less gas demand.

For the last half of 2017 and the first few weeks of 2018, oil prices spiked around 50 percent. Moreover, on January 11, they reached fresh four years highs, hitting the $70 per barrel. Prices have trended downward since then but are still hovering around the low to mid-$60 range for both London-traded Brent crude and NYMEX-trade West Texas Intermediate (WTI) crude. With OPEC, led by de facto leader Saudi Arabia along with non-cartel countries including Russia, pledging to keep supply off the market to allow crude inventories to remain near five-year OECD averages, oil prices should see support at least until the end of the year.

The spoiler of course could be U.S. crude output, led by shale production, which is projected to reach upwards of 11 million barrels per day (bpd) by year’s end, effectively pushing the US to the top global oil producer slot, bypassing Russia.

These higher oil and (particularly) gas prices are indeed good news for Santos since it has considerable gas producing assets. It’s a partner, along with U.S. oil and gas producer Conoco Phillips, and Inpex, Eni, Tokyo Electric and Tokyo Gas, in the 3.7 million tons per annum (mtpa) Darwin LNG project in northern Australia. Santos also has gas assets in Western Australia and the Cooper Basin, and interests in the PNGLNG project in Papua New Guinea, also a country that will likely see Santos make new LNG investments.

Santos is also led partner in the 7.8 mtpa Gladstone LNG project in Queensland, a leading project in the conversion of coal seam gas (CSG) into LNG. Project partners include Malaysian state-owned oil and gas giant Petronas, Total and Korea Gas Corp. (Kogas).

(Hydrocarbon) marriage made in heaven

Santos is also forward looking as it tries to secure more end-users for its gas, particularly in China, a market ripe for LNG producers looking to unload cargoes, both on the spot market and in securing long term supply deals.

Gallagher also said on Wednesday that it was in talks with its top shareholder, China’s ENN Group – China’s biggest gas distributor, to form a LNG joint venture (JV) to help meet China’s gas demand needs.

Securing a JV with ENN Group would be a strategic move, helping Santos to avoid sliding back into a financial free fall that plagued it over the past several years.

Along with investing, operating and managing gas pipeline infrastructure, ENN also operates vehicle/ship gas refueling stations, and the sales and distribution of piped gas, LNG and other energy.

ENN Group also conducts wholesale gas operations in connection with gas supply. As of 30 June 2017, the company operated 165 project cities in China in 17 provinces, municipalities and autonomous regions, covering a connectable urban population of over 78 million people. Given China’s increased gas thirst, ENN is projected to grow accordingly.

“With an end user like ENN, we see that as a marriage made in heaven,” Gallagher said.

If an agreement is reached between Santos and ENN, it’s not only a win for Santos but for China as well. Beijing’s push to offset record air pollution in its urban centers by speeding up the replacement of coal with cleaner burning natural gas needed for thermal power production has allowed China to pass South Korea as the world’s second largest LNG importer. Related: Toyota Finds A Way To Make Cheaper EVs

Moreover, that demand is projected to only increase amid the government’s mandate for gas to make up at least 10 percent of the country’s energy mix by 2020, with further increases by 2030. According to customs data, China imported 38 million tonnes of LNG last year, an increase of 46.6 percent from the previous year.

China’s gas thirst is revolutionizing LNG markets in Asia, if not globally, and will continue to offer support for prices, a stark contrast from anemic spot prices over the past several years coming from an historic supply overhang and ramped-up production from eight major Australian LNG projects and exports from U.S.-based Cheniere Energy. Several more US-based LNG export projects will become operational this year.

China’s increased gas appetite and LNG import uptick is arguably the greatest single LNG market influencer since Japan’s increased procurement of the super cooled fuel after the Fukushima disaster in 2011 and the subsequent shutdown of its some 50 nuclear reactors needed for power generation.

Coming full circle, a robust JV with ENN will help Santos continue to post strong financials, while allowing it to diversity its portfolio of buyers and make visions of hostile take-overs a thing of the past.

By Tim Daiss for Oilprice.com

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