CEO SEAAOC speech

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


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


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.


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.


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!


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.


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!


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!


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


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.


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


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.


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


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.


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.


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


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


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%.


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


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

CEO SEAAOC speech

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