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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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How The Trade War Could Benefit Australian Gas

Australian oil and gas producer Santos, the operator of the GLNG project, could win any comeback kid awards in the global energy patch. From several years of turmoil during the recent roil in global oil and gas markets that made the company bleed red ink, making it a prime take-over target, it continues to come back swinging, posting stellar production and sales numbers.

On Thursday, the Adelaide-based company reported quarter-on-quarter increases in its oil and gas output and sales volumes.  Production reached 15 million barrels of oil equivalent (mmboe), compared to 14.2 mmboe reported in the second quarter of the year, the company said. Sales revenue increased 10 percent to $973 million, including record quarterly LNG revenues of $405 million. Santos reports its financials in USD not Australian dollars.

Sales volumes for the third quarter were higher than the previous quarter primarily due to a full quarter of production from the PNG LNG project following the impact of the earthquake that hit Papua New Guinea (PNG) in the first half of the year and the planned one-month maintenance shutdown of the Bayu Undan/Darwin LNG facilities in May.

Riding the wave of higher oil/gas prices

Sales revenues also spiked on the back of higher commodity prices. Global oil prices have spiked nearly 60 percent in the past year, from around $55/barrel to now trading in the low $80s range. Earlier this month oil prices breached the mid $80s price point amid worries over more Iranian barrels being removed from the market as fresh U.S. sanctions are slated to hit Iran’s energy sector on November 4.

Santos also shows a strong balance sheet to support growth. The company’s net debt reduction target was achieved at quarter-end, more than a year ahead of plan. As at September 30, Santos had cash and cash equivalents of $1.8 billion and total debt of $3.8 billion, resulting in net debt of $2 billion, the company said in its third quarter financial disclosure.

Santos Managing Director and Chief Executive Officer Kevin Gallagher said “Santos is now positioned for growth with a number of upstream brownfield development opportunities leveraging existing infrastructure positions across each of our five core assets and is targeting production of more than 100 mmboe by 2025, almost doubling current levels of production.”

Related: Carbon Pricing Won't Kill Big Oil

“Strong operating performance during the third quarter saw sales, production and sales revenues all higher than the previous quarter,” he added.

Going forward

Santos’ numbers were also boosted by increased LNG spot prices in Asia, which recently reached fresh four-year highs, also increasing some 21 percent on the quarter. Though spot prices are off slightly so far this month, they spiked in September in anticipation of winter demand after a hot summer depleted stockpile. China was seen as providing support to prices after the country got caught short last winter with its storage capacity still low as Beijing energy planners moved too quickly to replace coal usage in both industry and residential end users in northern China with cleaner burning natural gas.

Going forward, Santos should be able to maintain its healthy sales growth amid increased gas demand, especially from China and as the country continues to turn to the spot market to fill supply gaps.

A pending 10 percent retaliatory tariff by Beijing on U.S. sourced LNG that will increase to 20-25 percent at the start of the year will also help Santos’ financials. First, the company can offer spot cargoes to replace or compete with U.S. sourced LNG cargoes on the spot market. Second, Santos, as well as other producers and trading houses, will be able to price its spot LNG at a premium, likely raising prices to just below what U.S. sourced LNG will cost including the increased tariff.

Unfortunately for China, its LNG tariff will likely backfire and cause as much or more pain for itself than it does for the U.S. since costs will mostly be absorbed by China’s national oil companies (NOCs). On the flip side of the equation, China’s LNG tariff will make it more difficult for several U.S.-based LNG project proposals to secure funding and long term off-take supply deals putting the U.S.’ so-called second wave of LNG development in jeopardy.

By Tim Daiss for Oilprice.com

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