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LNG supply risks escalate for Asia on shock court ruling

Angela Macdonald-SmithSenior resources writer

Australia’s reputation as a destination for LNG investment among Asian customers has been dealt a blow by a shock court ruling that could delay Santos’ $4.7 billion Barossa gas project by up to 18 months.

The court decision, which has the potential to scupper the project north of the Tiwi Islands, comes as Asian customers are already unsettled by a push for curbs on gas exports.

The landmark ruling handed down by Federal Court Justice Mordy Bromberg on Wednesday over a failure to adequately consult Indigenous people in the Tiwi Islands overturns an approval previously granted by the offshore petroleum regulator.

Santos must cease drilling in the Barossa gas field north of the Tiwi Islands, a court has ruled. 

It puts at risk exports due to start in 2025 from Santos’ Darwin LNG plant. The plant is a core Santos asset that, once upgraded to extend its life, is due to supply LNG to partners and customers in Japan and South Korea, two of Australia’s biggest trading partners for gas.

Shares in Santos dived as much as 5.3 per cent on Friday to a low of $7.34.

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The setback comes as Santos’ partners in its GLNG export venture in Queensland have been shaken by talk of triggering the Australian Domestic Gas Security Mechanism (ADGSM). Japan and South Korea have sought assurances from the Labor government that gas exports critical for their domestic economies will not be diverted.

It is expected to rattle investors in Australia’s LNG sector such as Chevron, ExxonMobil and Japan’s Inpex Corporation, which have been voicing concerns about rising sovereign risk, and domestic player Woodside Energy, which is facing several legal challenges to its $16.5 billion Scarborough project under construction in Western Australia.

Past rulings overturned

Santos is pushing for a review of the Barossa ruling by the Full Federal Court, citing “the significance of this decision to us, our international joint venture partners and customers, and the industry more broadly”.

It called for Australian governments to urgently address the resulting uncertainty over project approvals “to reduce risk for trade and investment in projects around the country”.

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Justice Bromberg has a record of having rulings overturned on appeal, including in March when the Full Court rejected a trial ruling supporting a Melbourne schoolgirl who argued an environment minister owned a special duty of care to young people to consider climate harm when assessing projects.

Credit Suisse analyst Saul Kavonic said the Barossa ruling was a much bigger sovereign risk issue than government intervention in the east coast gas market and pointed to the legal challenges to Scarborough and to Santos’ clean energy claims.

“Rising environmental activist litigation in Australia presents material sovereign risk,” Mr Kavonic said.

“The ability for a project to be halted, once well into construction and after achieving good-faith regulator approvals, presents a material risk to the investment environment, in our view.”

He said that if Santos’ appeal was unsuccessful, the energy minister might need to step in to facilitate the project, “rather than let activist litigation derail investment that is supported by the government and is consistent with regulations as have been applied historically”.

The decision adds to this week’s upheavals in Australia’s energy sector, including surprise sell-outs by Origin Energy from the Beetaloo gas project in the Northern Territory and at the Vales Point generator in NSW.

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At the same time, the country’s biggest power generator, AGL Energy, is in disarray, struggling to put in place a refreshed board and strategy that satisfies investors including billionaire Mike Cannon-Brookes, who wants a speedier exit from coal power. AGL will update investors next week on its strategy review.

The problems at Barossa, where Santos is partnered by giant Japanese LNG importer JERA and Korea’s SK Group, put at risk the new source of gas for the 3.7 million-tonnes-a-year Darwin LNG project that is set to undergo a $US600 million ($905 million) upgrade on the basis that gas would underpin another 20 years of exports.

They come amid a global squeeze in gas that has caused prices to rocket and just as Energy Minister Chris Bowen said he was willing to consider emergency requests from Europe for Australian LNG to help replace Russian gas.

Santos is signalling that Barossa, where construction is 46 per cent complete, can still start production in mid-2025 and absorb the extra costs caused by delays in drilling, which started in July and must now be shut down by October 6.

But UBS analysts led by Tom Allen are “conservatively” assuming a cost blowout to $US3.9 billion from $US3.6 billion and a delay in start-up to the end of 2025, cutting forecast earnings per share that year by 4 per cent.

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Mr Kavonic also assumes a delay of about six months if Santos wins on appeal, but of 18 months or more if it fails and has to redo its environment plan.

Exports from Darwin LNG using the existing gas source, the Bayu-Undan field in the Timor Sea, are due to cease later this year when the field runs dry, and a delay would keep the plant offline for longer.

UBS estimates the venture will incur drill rig costs of about $US220,000 a day plus other daily “regret” costs on service contracts for helicopters, work boats and other engineering resources.

“While drilling was not on a critical path, suspended activity in the months leading up to cyclone season (November-April) will impact schedule in our view,” they said.

“We do not believe construction of the Floating Production and Storage Offloading platform is yet at risk, nor is there added risk that the Commonwealth repeals its approval of the project’s Environmental Impact Statement,” they added. They noted that if Santos cannot secure an expedited appeal hearing and the appeal goes against it, “there is further downside risk to our view”.

UBS said the court decision could set a precedent for much broader consultation obligations that have been enforced in the past, and that until the legal ruling is clarified, the offshore petroleum regulator and state resource ministers may withhold or slow drilling approvals.

The Environmental Defenders Office, which supported the litigation against Santos by Tiwi Island elder Dennis Tipakalippa of the Munupi clan, is also involved in the litigation against Woodside on Scarborough.

Angela Macdonald-Smith writes on the resources industry with a focus on energy, including gas, oil, electricity and renewables. Connect with Angela on Twitter. Email Angela at [email protected]

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