Santos feels a cooling breeze

SANTOS is feeling the cool winds of an easing construction boom, with its contractor prices falling 15% to 30% over the previous six months.
Santos feels a cooling breeze Santos feels a cooling breeze Santos feels a cooling breeze Santos feels a cooling breeze Santos feels a cooling breeze

Managing director David Knox told media on Friday that drilling efficiencies and a reduction in materials prices were combining to drive its costs down. But labour rates were still high, he said.

"That's not just labour rates or anything like that, we're also seeing some efficiencies being driven through as the frantic rush comes off and we come back to a more stable situation," he said.

"What I think we're seeing is a combination of improving practises, greater efficiencies and we're also working with our really big suppliers to be quite strategic on how we organise ourselves."

He also predicted that the lower costs would be measured over the "next few years".

With the industry feeling the wrath of a heated construction sector in recent times, news of a reduction in costs will be welcome, although it is unclear at this stage whether this is a wider trend.

With Australian LNG projects in particular under price pressure - and Knox saying today that GLNG would not come under the $18.5 billion price tag, while denying it would exceed this level - any news of a reduction in costs across drilling and construction is welcome.

LNG supply boom?

However, while the industry continues to argue that emerging supply from other destinations threatens contestable supply, Knox denies that volumes from the US in particular will undercut Australian LNG.

"The notion that there's going to be cheap LNG on the high seas is, in the longer term coming from wherever I think is fanciful. I don't believe that's the case, I believe gas is going to have a very important role to play," Knox said.

Thus far, three LNG exports from the US to non-free trade agreement countries had been approved by the US department of energy, and with the prospect on many more on the way, some investors have been made nervous by commentary on what effect this could have on Asian markets.

"I see some gas coming out of the US, but we would say somewhere between 40 to 50 million tonnes," Knox said.

"That's 10% of global LNG supply. That in itself is important, but it's not going to significantly shift the supply demand position, and also I don't see in the long-term that the gas will be cheap.

"In order to transport it from the east coast of America into any of the Asian markets, that costs at least $7, and possibly more. As you can already see if you're in Tokyo Bay, you'll have to pay the Henry Hub price plus at least $7.

"So it doesn't take an awful amount of rise in the Henry Hub price for it to be the same price we can deliver it from Australia."

Investors are also nervous about the prospect of LNG contracts being rewritten as Asian customers seek to leverage the increasing supply side situation to push for lower pricing.

However, Knox said this would not affect Santos.

"We have contracts from Darwin to PNG from GLNG and we'll be seeking contracts assuming we go forward on Bonaparte," he said.

"All of the Darwin, PNG and GLNG contracts are rock-solid, copper-bottom contracts signed at sales purchase agreement level."

He said that some contracts were subject to price reopeners, but this amount would be very small either way.

New South Wales

Turning to its headline-grabbing NSW projects, Santos said that it was losing momentum "day by day" as it aims to supply 100 terajoules per day of gas into the domestic market by 2017.

"Now," Knox bluntly said when questioned about when it needed to get going on the ground in order to hit its targets.

"The time is now. We're losing day by day. We need to move forward now."

He said that he simply wished the NSW government would stand behind its own regulations.

"On New South Wales, just let me be very clear: there is a gas supply shortage that is looming in New South Wales. We've been very straightforward and very clear about that," Knox said.

"The regulations are in place and now we need the New South Wales government to support that regulatory process, which they've set up, and give us regulatory certainty to allow us to really move forward.

"What I want to do now is move forward and increase the pace.

"What I need from the NSW government is that they stand behind their own regulatory process, and give us the approval and support we need to really get on with the project."

NSW chief scientist Mary O'Kane is preparing a review into CSG activities in the state, set to report to government next year. It is unclear whether this review will result in further sweeping regulatory changes, but Knox will undoubtedly be hoping it doesn't.

He also said that Santos had elected to start in Narrabri, where it sees greater community support for the project than in other areas.

"We believe we can make some good progress and get some runs on the board," he said.

"We believe we have the good support of the Narrabri locals and the community to move forward."

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