Post on 29-Jan-2018
Page 1 of 20 Santos Ltd l August 2017
The case for onshore gas in the NT
Thank you Ashley
Before I say a few words, I’d like to acknowledge the Larrakia people, the
Traditional Owners of the land on which we meet today, and pay my
respects to Elders past and present.
I am delighted to be addressing you at the opening plenary of one of the
most important oil and gas conferences in Australia.
Firstly let me say how great it is to be here in the Northern Territory - and
that’s not because I am escaping the freezing weather in Adelaide! The
NT is in Santos’ DNA.
Indeed it’s embedded in our name – South Australia and Northern
Territory Oil Search… So despite my Scottish accent, this feels a little
like coming home!
Santos has a long and proud history in the Northern Territory. Sixty
years ago Antarctic Explorer Sir Douglas Mawson convinced a then
fledgling oil and gas explorer to add areas of the Northern Territory to its
exploration portfolio, thereby leading to the company name.
If Mawson was here today, I would personally thank him for his vision
and foresight. The Northern Territory is core to our past and critical to
our future. For a natural gas company like Santos, there couldn’t be a
more prospective region in Australia.
CEO SEAAOC Speech
Page 2 of 20 Santos Ltd l August 2017
Natural gas is an important resource for meeting the dual challenge of
growing energy demand and reducing emissions.
The International Energy Agency (or IEA) estimates that global energy
demand will grow by 40% by 2050, fuelled by population growth and
rapid urbanisation in Asia, especially China and India.
To meet our emissions reduction commitments under the Paris
Agreement, while also meeting global energy demand, higher emission
fuels, such as coal and oil, need to be displaced with lower emission
fuels, like natural gas and renewable energy.
The benefits of natural gas are clear. When used in power generation,
gas is 50% less emissions intensive than coal. It’s also the cleanest and
most reliable fuel to back up intermittent renewable power. Gas
responds more quickly to changes in the grid than other fuels.
So as you can see, growing gas demand works hand-in-hand with
growing renewables and our transition to a clean economy.
Clean air is not just a preference in developing countries – in some
cases, it’s a matter of life and death. Last year, the IEA estimated that
air pollution leads to 6.5 million premature deaths every year. That’s
more than the entire population of Victoria, dying each year from
exposure to air pollution.
It’s no wonder that governments in developing countries are seeing the
benefits of natural gas and are working to bring more of it into their
Page 3 of 20 Santos Ltd l August 2017
energy mix to replace coal. An important fact worthy of consideration for
all those folks trying to shut our industry down!
The Chinese government aims to grow gas demand from around
6% share of its energy mix today, to 8-10% by 2020. Due to rapid
population and energy demand growth, this will see gas demand
almost double.
The Indian government also announced that it wants to more than
double the share of gas in its energy mix.
South Korea’s new President wants to increase LNG from 18% of
its energy mix today to 37%, while raising renewables from around
2% to 20% by 2030.
South East Asian countries, including Indonesia, Philippines,
Vietnam, Thailand and Bangladesh are all looking to start or
increase LNG imports to offset declining domestic supply.
These countries are developing their economies, and renewable energy
just doesn’t cut it today, nor will it for some time to come. If we stop the
gas, they will burn more coal!!
And of course, there is the US. The US shale gas boom has driven down
gas and electricity prices, reignited the manufacturing sector and brought
about a major reduction in carbon emissions.
In the US a decade ago, manufacturing was on the slide, with companies
leaving the country to lower cost destinations such as Mexico. The shale
boom has reversed this trend.
Page 4 of 20 Santos Ltd l August 2017
Manufacturing has been reinvigorated because energy cost is such a
critical factor in most forms of manufacturing. The US has now created a
global competitive advantage in manufacturing based on cheap gas.
Forbes Magazine predicts that by 2020, more than 150 new natural gas
power plants will come into service in the US, representing a 20%
expansion in capacity. Gas is now nearly 50% of all US power capacity
- given coal and nuclear retirements and the requirement to back up
renewables.
Electricity prices in most parts of the US are now around $30 per
megawatt hour, or below. In Victoria the price is over $100. In South
Australia, which has prided itself on the highest penetration of renewable
energy in the country, the price has been around $150 per megawatt
hour – that’s five times what it is in the US.
The US has already demonstrated how gas can help to reduce carbon
emissions. By switching from coal to gas and renewables in power
generation, it has cut its energy-related carbon emissions by 21% since
2005. That’s a reduction of 400 million tonnes of emissions – every year!
All of this has been as a result of the US government being pro-gas and
pro-development. By contrast what we are experiencing here in Australia
has resulted from a series of moratoriums and restrictions to new
developments, limiting new supply.
Page 5 of 20 Santos Ltd l August 2017
So it’s clear natural gas has a critical role in powering the world’s largest
economy and cleaning up air quality in Asia. There is an estimated half-
trillion dollars in new gas investment up for grabs globally as Asia grows.
So how does this play out for Australia and the Northern Territory?
As a key supplier of natural gas to Asia, Australia has played a huge role
in helping rapidly growing economies meet their energy demand.
In the past, Australia has had the reputation advantage of being a low
risk country with a transparent rule of law for investors, and no nasty
surprises.
This reputation helped us attract over $200 billion in LNG investment
over the past decade and secure premium prices for our gas, despite
being an expensive country for development.
Australian LNG is making a real difference in cleaning up Asian air
quality. Every year Australian LNG exports reduce carbon emissions in
Asia by over 300 million tonnes per annum by displacing coal with gas
for power generation. Under the Paris Agreement, Australia has
committed to reducing carbon emissions by 100 million tonnes per
annum by 2030. So by exporting LNG to Asia, Australia contributes
three times more than our commitment under the Paris Agreement – and
we will do this every year from next year!
Page 6 of 20 Santos Ltd l August 2017
I don’t think Australia gets the credit we deserve for helping improve the
quality of air across the Asia region, thereby reducing the number of
premature deaths as a result of air pollution – never mind the obvious
climate benefits.
Natural Gas also has a critical role to play in providing reliable and
affordable energy to Australian homes and business, while delivering
jobs and economic benefits to our people.
Gas is Australia’s third largest natural resource.
Australia’s oil, gas and energy industry creates over 100,000 Australian
jobs and has contributed more than $250 billion to the Australian
economy.
More than 50% of Australian homes rely on natural gas for heating,
cooking or hot water.
Gas also powers 40% of our manufacturing industry and is a key
feedstock for chemicals and plastics – a sector that is critical for our
economy. !
Australia is a gas rich nation, but our own businesses and households
are being stressed by higher gas prices. Anyone who has read the
paper would realise that we face economic, social and political
challenges that are creating considerable uncertainty about the future of
natural gas in Australia’s energy mix.
Page 7 of 20 Santos Ltd l August 2017
Let me start with high gas prices. Australia has in the past enjoyed low
domestic gas prices due to strong supply and relatively low domestic
demand. Over the past 5 years, however, gas prices on the East Coast
have been steadily rising in response to a number of factors including:
an increase in export demand at a higher netback LNG price,
increasing exploration and development costs for new sources of
supply, and
transport costs due to a developing pipeline network and the
distance gas is required to be transported.
The challenge we face is that the cheap gas has been developed and
today it simply costs more to get gas out of the ground. It is then
transported vast distances to our largest users who are mainly located in
states that are restricting local supply and hence, becoming importers.
Unbelievably, it costs more to transport gas around 1000 kilometres by
pipeline from Wallambilla to Sydney, than to ship gas approximately
8500 kilometres from Gladstone to Shanghai, China.
Gas producers must now become low cost manufacturers in order to
compete. Technology and innovation are key to reducing production
costs. The development of unconventional shale oil and gas in the
United States became competitive through adopting a manufacturing
approach to drilling and developing. Santos has adopted a similar
approach and can proudly claim the title of Australia’s lowest cost
onshore developer – something our people have been working towards
tirelessly for the last 18 months!
Page 8 of 20 Santos Ltd l August 2017
Despite our efforts to bring down costs; regulatory constraints imposed
on exploration and development have prevented new sources of gas
supply coming onto the domestic market.
At the core of the problem is activism. I don’t want to dwell on activism, it
already gets far more copy than it deserves, but is has been so
successful in influencing government decision-making across Australia,
its impact is worth pondering further.
Despite comprehensive scientific research consistently proving that
shale and coal seam gas developments can go ahead safely with
appropriate regulation, today in Australia:
Victoria has imposed a ban on all onshore gas exploration and
development.
New South Wales has restricted exploration and production
activities, and
Here in the Northern Territory we face a fracking moratorium
pending an independent scientific inquiry.
As an industry we need to be better at communicating the benefits of
natural gas development… And we need to respond to the alarmist lies
and half-truths propagated by activists. We need to regain our social
licence to operate.
However, sometimes the information we need to communicate is
complex. Take ‘fracking’, for example. It sounds bloody awful!
Page 9 of 20 Santos Ltd l August 2017
Or try to explain ‘well integrity’… You’ve quickly lost your audience. A
sensationalist story about water contamination risking the livelihoods of
farmers is always going to get more air time than explaining that the risk
of vertical fracture propagation through 1000 metres of shale is
effectively zero.
However we have to keep telling our story. If we don’t, activism may be
successful in squeezing natural gas out of Australia’s energy mix. This
would be bad for Australia’s economy and very bad for Australia’s
emissions. Ironically, this could support the development of more coal to
provide baseload power for renewables, which will do very little to bring
down our carbon emissions. Reducing emissions is something our
opponents claim to aspire to – sometimes you have to wonder…
High gas prices today are in part due to basic supply and demand
economics – when you restrict supply either through denying access or
over-regulation, prices go up.
This issue is front and centre of the national conversation and the
political pressure on governments is rising to implement policy solutions.
Santos wants to be part of the solution for Australians because we are
Australian!
Though as you would be aware, Santos has been in the cross-hairs of
the Federal Government’s Australian Domestic Gas Security
Mechanism, a tool allowing the Commonwealth to intervene in the
Page 10 of 20 Santos Ltd l August 2017
market to force a project to default on contracts if there is a supply
shortfall – even if that shortfall is created by others.
This is not the place to debate the pros and cons of this policy except to
say, if there is a supply issue, there has to be a better solution than
targeting the only project that has all its gas committed under long term
offtake agreements.
Santos is actively working with the Turnbull Government and our
partners to bring energy security to Australian households and
businesses. You will have seen on Monday this week we announced an
agreement with ENGIE, to supply gas to the Pelican Point Power Station
in South Australia, and we will have more gas supply news over the next
few weeks and months.
The point is, the best cure for high prices is new gas development and
for this to happen, our industry needs policy certainty and support.
Let’s talk about the NT. The Northern Territory contains a vast proven
unconventional shale gas resource. The potential gas resource is in
excess of 260 trillion cubic feet which is larger than all of the Australian
identified conventional gas resources. This is more than enough gas to
enable the expansion of the Darwin LNG project and supply the East
Coast.
Page 11 of 20 Santos Ltd l August 2017
More exploration and appraisal is required, and there are certainly some
challenges to overcome, the moratorium on hydraulic fracturing being a
key one!
Nevertheless exploration results from the McArthur, which includes the
Greater Beetaloo; and the Southern Amadeus Basins are very
encouraging.
Since 2012, Santos has invested a significant amount of time and money
exploring these gas prospective basins.
When we first began these activities, we were dealing with frontier
opportunities, where only a limited amount of exploration data had been
acquired.
Both opportunities were considered high financial risk but offered the
promise of considerable upside in the event of a successful outcome.
In the Southern Amadeus, after acquiring 2,500 kilometres of seismic
data, we have now uncovered a potentially significant prospect.
We still have some more work to do, including acquiring some more data
and gaining a better understanding of the rocks. But we have certainly
come a long way, and by investing in new data and doing the quality
work that was required, we have substantially de-risked the opportunity.
All things going well, we now hope to drill in the next year.
The McArthur and the Greater Beetaloo Basins comprise an area of
250,000 kilometres. Only 40 wells have been drilled but it is clear that we
Page 12 of 20 Santos Ltd l August 2017
are dealing with a multi TCF system with positive geology. The case for
appraisal of these resources is clear.
In 2012 following a review of all Australian potential shale basins, we
entered the Greater Beetaloo Basin through a farm-in to EP161, an area
that hadn’t seen any previous exploration activity.
Regional geological studies indicated a possible easterly extension of the
Beetaloo Basin. Seismic data acquired by Santos in 2013, confirmed
this extension and indicated potentially suitable subsurface conditions for
a shale play.
There were still significant risks however, in particular around the quality
of the shales and the gas content of these very old rocks.
In 2014, we drilled the Tanumbirini well - one of the deepest wells ever
drilled onshore in Australia. We encountered an expanded section of
gas-charged high quality shales in the Velkerri formation.
It delineated an important easterly extension to the Beetaloo Basin and
was the first well to verify the shale gas potential of the Velkerri.
Last year, we drilled a stratigraphic well, about 25 kilometres away,
which successfully cored the full section of Velkerri and confirmed the
quality and consistency of the shales.
Using the Tanumbirini results, total volumes in place over the shale
interval have been calculated at 163 billion cubic feet per section, and
the shales are prospective over 700 sections in EP161.
Page 13 of 20 Santos Ltd l August 2017
This implies in place gas volumes of 109 trillion cubic feet.
Now there are certainly some key issues that need to be addressed
before we can fully realise this opportunity. The key outstanding issues
relate to the rate and volume of gas production when the shales are
hydraulically stimulated.
We need to undertake a comprehensive appraisal program, requiring
hydraulic stimulation of the shales, before the commerciality of the
resource and a development plan can be determined.
As you know, we can’t frack at the moment and there’s the possibility
that we may never be able to develop this resource, depending on the
outcome of the current inquiry. To see such a prospective resource go
undeveloped would be a travesty for the NT, the natural gas industry and
of course the manufacturing industry on the east coast.
Moving to offshore NT - Santos has one of the best discovered resource
positions – if not THE best – in offshore Northern Australia, and a highly
prospective exploration position.
We are a foundation partner in Darwin LNG and the only Australian JV
partner in the project.
While I have the opportunity, I would like to acknowledge the efforts of
the operator, ConocoPhillips. I understand Chris Wilson will speak
Page 14 of 20 Santos Ltd l August 2017
tomorrow on the strong Darwin LNG performance and the successful
Barossa two-well appraisal campaign – so I will keep this brief.
We are confident we can keep Darwin LNG operational beyond Bayu-
Undan by developing Barossa as backfill.
The successful production test of Barossa-6 has strengthened the field’s
position as lead candidate to supply backfill gas to Darwin LNG.
To look at the potential benefits of a thriving natural gas industry in the
Northern Territory, you don’t have to look further than the US.
A recent PricewaterhouseCoopers study showed that in 2015, the oil and
natural gas industry contributed 10.3 million jobs and $1.3 trillion to the
US economy, despite low commodity prices.
The exciting news is that the Northern Territory’s Beetaloo Basin has a
shale gas play comparable in many respects to the US’s Marcellus shale
play, one of the States’ largest shale resources.
The Marcellus covers parts of New York, Pennsylvania, Maryland and
West Virginia, and is one of the highest producing fields in the US,
delivering around nearly 20 billion cubic feet of gas per day, well in
excess of 20% of US gas production. In 2007, production was virtually
zero.
According to reports, the Marcellus Shale play revitalized the region’s
economy and strengthened America – literally overnight.
Page 15 of 20 Santos Ltd l August 2017
While of another scale, can you imagine the economic benefits that
would flow to the NT with the further development of the NT shale gas
resources?
Multiple studies and reports published over the last five years have
confirmed that the unconventional gas sector can contribute significantly
to the prosperity of the nation as a whole and to the Northern Territory in
particular.
Another visionary, nation-building opportunity that could bring further
jobs and benefits to the region, is the NT to Moomba pipeline.
Transporting and processing NT gas through Moomba makes good
sense because it has all the necessary processing infrastructure in place
and a pipeline network connecting all the east coast markets.
It is too soon to discuss the economic viability of the concept but it will
require significant Federal Government financial support.
Importantly, by developing natural gas, the NT can create a low cost
energy advantage, which could attract manufacturing from other states.
As Australia’s lowest cost onshore operator, Santos is confident that we
can develop shale gas resources in the NT safety, sustainably and
affordably.
Page 16 of 20 Santos Ltd l August 2017
Today Santos employs over 3,000 people with a head office in Adelaide
and major offices in Brisbane, Sydney, Perth and if the fracking inquiry
supports onshore development, I’m pleased to say we will be adding
Darwin to the list.
Santos has been an NT resident for over 60 years. We’re absolutely
committed to ensuring the economic and social benefits of a successful
shale gas industry flow back to the Northern Territory community.
In just a few days, on August 20th, Santos will celebrate its 50th
anniversary of hydraulic fracturing. Santos hydraulically fractured our
first well in the Cooper Basin in 1967.
Since that time we have fracked over 1400 wells in South Australia,
Queensland and the Northern Territory – with no impact on groundwater
resources. The repeated false claims about fracking contaminating
water resources are simply untrue.
As you can imagine fracking technology has completely transformed
since 1967 when we fracked our first well, and continues to constantly
evolve. Today hydraulically fractured wells provide more than two thirds
of US gas production.
As Australia’s lowest cost onshore operator Santos has the ability to
make marginal fields economic. That’s good news for the NT!
By adopting innovation, lean principles and focussing on technical limits
across drilling cycles, drilling costs on our Cooper Basin asset have
Page 17 of 20 Santos Ltd l August 2017
reduced 58% since 2014 and drilling cycle times have halved. The
Cooper Basin is a mature field, which has been producing natural gas for
more than 50 years. Only 12 months ago the Cooper was considered to
be in decline. Due to significant cost reductions we are seeing new
opportunities in the Cooper that could help increase gas supply and
deliver more gas to the East Coast market.
On our GLNG operations in Queensland, our Roma drill-complete-
connect costs have reduced by 83% since 2014 and we have reduced
drilling cycle time by 68%.
This dramatic improvement will help unleash capital to increase drilling
activities and unlock equity gas for our GLNG asset. In 2017 we are now
aiming to drill around 170 wells, up from 130-150 wells at the start of the
year – for the same cost!
Water is a precious resource and we understand there are legitimate
concerns about water protection and management amongst our
communities. Our focus on water preservation has driven some
incredible innovations.
Our drilling and completions operations in Roma achieved remarkable
results by rethinking water management across the lifecycle, from
source, transport, storage and disposal.
Instead of using trucks to transport water like in previous programs, the
D&C team used the existing water production gathering network as a
Page 18 of 20 Santos Ltd l August 2017
conduit to transfer fluid. Fluid for use in fracture stimulation operations
was transferred from producing wells to the newly drilled wells. This
enabled produced water to be effectively transported, recycled and
stored for the fracture stimulation program and removed the requirement
for water to be trucked between sites.
The innovation resulted in an 82% increase in water being recycled or
reused, while overall water usage was also reduced by 50%. This
removed the need to draw on local water resources.
The new approach also minimised the environmental disturbance caused
by trucking, with water disposed by trucking reduced by 95%, and
trucking hours reduced by 81%.
Finally I want to touch on how Santos aims to leave a positive legacy.
Over the past 10 years we have invested over $200 million in local
community sponsorships and investment programs to help build vibrant
communities and contribute to the regions where we operate.
As an Australian company we know how important it is to work closely
with local communities, traditional owners, landholders and local
businesses to ensure the benefits of natural gas development flow back
to the community. We have seen communities like Roma in
Queensland, completely transformed through the jobs and economic
benefits gas development has bought to the region. Unemployment in
Roma has been low for many years, and remains so. Recent
government figures show the town’s unemployment rate to be 1.9%
compared to the Queensland average of 6.1%.
Page 19 of 20 Santos Ltd l August 2017
One of the things we are most proud of is our work with local suppliers to
help develop a service industry with skills that go well beyond our
project.
One example is Nitschke Energy Services, who are a small, local,
privately owned company based in Hahndorf, South Australia. They
supply well completion, maintenance and work-over services for
conventional and unconventional oil and gas projects.
Santos worked with Nitschke to develop a fit for purpose rig that was
suited to the Cooper Basin. Combined with a work plan to improve
operational efficiencies, the use of this rig resulted in a cost reduction of
more than 50% per well when compared to a conventional workover rig.
Santos recently executed a 41 well campaign using these rigs, and were
able to remediate marginal wells due to the low execution costs. We are
now working with Nitschke to prepare for a larger scale project. Not only
will this work secure a long term relationship with Santos, Nitschke have
also now built equipment and skills that will provide them with a
competitive advantage in their field.
In summary, we believe Natural Gas is critical to supporting the global
transition to a clean economy, though in Australia we face social,
economic and political challenges which is limiting our ability to develop
gas for the domestic market. Australia urgently needs sources of new
gas supply to underpin its domestic gas requirements and to ensure the
longevity of the important LNG export industry – so it’s in the best
Page 20 of 20 Santos Ltd l August 2017
interest of Australia to encourage the appraisal of onshore gas resources
as soon as possible.
The Northern Territory contains abundant, prospective gas resources
that could be a game changer for East Coast gas supply, while bringing
jobs and economic benefits to the region. In the longer term, we believe
the NT could become Australia’s centre of excellence for onshore gas
development and create a low cost energy advantage over the east
coast that can attract new manufacturing operations to the region. Of
course this all depends on whether onshore gas development is allowed
to go ahead!
Santos is committed to helping build a better future for the NT by making
sure natural gas is developed safety and sustainably. We’ll focus on
creating local jobs for local people, and we’ll work with local businesses,
government and traditional owners to build skills for the future.
We are confident that the NT’s best days are ahead with a thriving
natural gas industry.
Thank you