Santos defended its high-risk transformation into an LNG exporter at an investor briefing this morning, stressing the demand outlook for Australian gas remained strong and talking up recent exploration successes.
Santos expects to make approximately 20 per cent of its ongoing, pre-tax earnings out of gas sales to Asia from three fully contracted projects - Darwin LNG, PNG LNG and Gladstone LNG.
Chief executive David Knox said Santos's share of these projects would amount to 3.3 million tonnes per annum of LNG - sold under long-term, oil-linked contracts to customers including Tepco, Tokyo Gas, Kogas, Petronas, CPC and Osaka Gas – and highlighted this was a ‘‘very strong profile to have for a company of our size''.
Santos gave production guidance for 2013 of 53-57 million barrels, up from an expected 51-55 mmboe this year, with the start-up of Fletcher Finucane in the second half of 2013. Mr Knox reiterated the company’s target of a 6 per cent annual compound growth rate in production, resulting in 80-90 mmboe by 2020. Santos shares have gone up 21 cents or 1.9 per cent to $11.15 this morning.
Santos strategy and sales vice-president Peter Cleary discounted fears that Australian LNG exports sold at traditional oil-linked prices above $US14 per mmbtu would face heavy competition in Asian markets from exports of US LNG, where gas prices at the Henry Hub are $US3.90 today.
‘‘We’ve got to get over the fundamental misconception that because the price at the Henry Hub is cheap, therefore that gas is going to land cheaply in Asia,’’ he said. ‘‘It’s not necessarily that easy.’’
Mr Cleary said after liquefaction and shipping costs were added, and forecast increases at the Henry Hub were factored in, gas from the US would likely land in Asia at more than $US14.25/mmbtu.
He said if oil was priced at $US100/barrel, there was ‘‘not much difference’’ in the pricing between oil-linked and Henry Hub pricing and sophisticated Asian customers would ‘‘want a bit of both''.
‘‘What you won’t see is a dramatic shift from oil linkage to Henry Hub,’’ Mr Cleary said.
Mr Cleary said some of Santos’ long-term contracts did include price review mechanisms that allowed ‘‘small’’ adjustments to LNG prices - plus or minus 5 per cent against previous prices - every five years. But the clauses only allowed reference to other prices in the Australian region, not gas prices in other regions such as North America.
No need to raise capital
Chief financial officer Andrew Seaton said Santos would not need to raise capital over the next three years, despite forecast capital expenditure in 2013 of $4 billion, which included the recent cost blowout at the Exxon Mobil-led PNG LNG project, and the peak year for spending on the $18.5 billion coal seam gas-fuelled Gladstone LNG project in Queensland, plus exploration expenditure of $325 million.
Under reasonable scenarios, Santos had $2.9 billion of undrawn facilities and cash available in 2013-15 if oil prices return to $US100/barrel and $1.9 billion if oil prices were comparably low at $US75 a barrel.
Mr Knox said this week’s successful Crown-1 gas well in the Browse Basin off WA was a ‘‘very significant and exciting discovery’’ and also commented on the commencement of shale gas production at the Mooba-1 well in the Cooper Basin.
‘‘We did not expect this well to come on and flow as it’s done,’’ he said. ‘‘The key thing with that well is, can we replicate it? That could be something which would ultimately revolutionise the long-term future of the Cooper Basin''.
On its Gladstone LNG project, Santos said it would have 1100 terajoues a day of gas available to supply its first and second trains as they came online from the end of 2015, including from compression, storage and third party gas contracts.
Santos said it was on target to drill 150 wells in 2012, and hoped to step that up to 250-300 wells a year between 2013 and 2015, and 300 a year thereafter. Land access had been agreed for 200 of those wells in the 2013 program. So far Santos has drilled 480 wells, and has reduced costs per well by 40 per cent from $1.4 million to below $900,000.