Australian oil company Santos has finally pulled the investment trigger on the $3.6 billion Barossa gas and condensate project offshore the Northern Territory, but only after resigning itself to holding more project equity and market risk than it had ideally wanted.
Gas from the Barossa field will back-fill the ageing Darwin LNG plant, which would otherwise run out of feed gas in the next couple of years. As a fully amortised and de-risked liquefaction facility that began operating in 2006, drilling more wells to keep Darwin liquefying gas for another 20 years works out much cheaper than building a brand new greenfield LNG facility somewhere else.
Santos shelved a final investment decision (FID) on Barossa when Covid crashed the market a year ago, and subsequently said it couldn’t take FID without reducing its interest in the project to 40-50%. The company has now plumped to hold onto an equity stake at the top end of that range, meaning it will carry proportionally greater project risk on its books.
Moreover, less than half of the LNG volumes to come from Barossa have been pre-sold, leaving Santos exposed to being caught ‘long’ in periods of global oversupply (which happen with some regularity in the LNG game). The project will produce 3.7 million tonnes per annum (mtpa) of LNG, of which 1.5 mtpa is covered by a long-term contract. If the balance can’t be sold in a bear market, Santos will take 50% of the hit.
A recovering outlook for the LNG market — which has yo-yoed dramatically from last year’s Covid-induced demand destruction to an intense supply crunch at the start of this year — seems to have convinced the Santos board that this gamble will ultimately pay off.
LNG spot prices are stabilising with a healthy-ish forward curve in the $6-8/MMBtu range and oil prices are (amazingly) well above $60/barrel, a situation unthinkable a few months ago.
Yet the global gas market cannot support all new proposed LNG supply. Intense seller competition, enduring price sensitivity of Asian buyers and the relentless pressure of decarbonisation on European gas demand mean only the cheapest cargoes will find a home.
Santos seems confident that Barossa gas volumes processed through Darwin LNG will be among those that do, thanks to the low cost base of this brownfield development. With Santos holding half of the Barossa equity bag, bosses will be praying the next two decades will not see another Covid-esque ‘black swan’ event that pushes the project out of the money.