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[SYDNEY] After spending billions of dollars constructing a world-class liquefied natural gas export project in Australia, Santos has found itself short of gas.
The country's third-largest energy producer, which isn't pumping enough of its own gas to feed its Gladstone LNG plant yet, is having to buy expensive local supplies to fill the gap. Meanwhile, prices for the LNG that Santos is selling have plummeted by more than half in the past two years amid a supply glut driven in part by rising Australian production.
A US$200 billion investment splurge has put Australia on track to surpass Qatar as the largest global producer of LNG later this decade. At the same time that so much gas is being siphoned off for export, prices for natural gas within Australia have soared to more than double last year's level.
"GLNG is in a difficult position," said Graeme Bethune, chief executive officer of consultancy EnergyQuest, referring to Gladstone LNG.
"It's quite ironic because for years Santos was talking about the need for domestic gas prices to be higher and suddenly they are a gas buyer rather than a gas producer."
While gas exports have tightened the market and contributed to higher prices, they aren't the only driver. Prolonged cold weather and the restart of gas-fired power generation also conspired to push up costs, Andrew Smith, Shell Australia's chairman, said earlier this month. High prices should compel leaders to end state moratoriums on conventional gas exploration, he said.
Santos, which owns a 30 per cent stake in the US$18.5 billion GLNG project in the state of Queensland with partners Petroliam Nasional Bhd, Total SA and Korea Gas Corp., has slashed spending amid the collapse in oil and LNG prices, resulting in a slower- than-anticipated ramp up of gas from GLNG's coal-seam gas acreage. It still has to meet contractual obligations to buyers, forcing it to buy supplies from rival producers.
Santos said on Monday that it would take a US$1.05 billion writedown on the GLNG project. The company is set to reveal a A$20.6 million loss for the first half of 2016 when its earnings are released on Friday, according to forecasts by UBS Group AG.
A spokesman declined to comment further on Wednesday.
Spot natural gas in Brisbane, the nearest pricing location to Gladstone, rose to an average of A$10.33 a gigajoule in July, up from A$5.16 the year before, according to the Australian Energy Market Operator. Prices have averaged A$6.70 in August.
Rival energy projects in Queensland, including the Royal Dutch Shell Plc-led Queensland Curtis LNG project and Origin Energy's Australia Pacific LNG development, are in stronger positions because they're producing enough gas and can avoid expensive spot purchases, Mr Bethune said. Origin Energy reports full-year earnings on Thursday.
Those projects may still face underwhelming returns considering investment decisions were taken when oil was at US$100 a barrel, he said. Oil prices, on which many long-term LNG contracts are based, have plummeted amid a global glut.
Meanwhile, spot LNG prices have been hit further as new projects add supply while demand growth slows.
The average import cost of LNG in Japan, the world's largest buyer, fell to US$5.88 per million British thermal units in May, the lowest since 2005 and down 67 per cent from July 2012.
The bad news isn't over. New production facilities coming online over the next three years will depress spot LNG prices to US$4.50 in 2017 and US$3.80 in 2018, according to BMI Research.
Many of those plants are in Australia, with Origin's APLNG and Chevron Corp's Gorgon LNG adding capacity this year and next. Inpex Corp's Ichthys LNG terminal is expected to start up next year.