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Santos Ltd ABN 80 007 550 923 Ground Floor, Santos Centre 60
Flinders Street Adelaide South Australia 5000
GPO Box 2455 Adelaide South Australia 5001
Direct: + 61 8 8116 5000 Facsimile: + 61 8 8116 6723
TO: Company Announcements Office ASX Limited FROM: Company
Secretary DATE: 7 June 2011 SUBJECT: Address by Peter Cleary during
the Asian Oil and Gas Conference Please find attached an address by
Peter Cleary, Vice President Strategy & Corporate Development,
presented during the Asian Oil and Gas Conference in Kuala Lumpur
during June 2011. David Lim Company Secretary
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1
Evolution in LNG
Address to Asian Oil and Gas Conference
Peter Cleary, VP Corporate Strategy & Development,
Santos
7 June 2011
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Thank you for your kind introduction Datuk Anuar Ahmad.
It is a pleasure indeed to be here in Kuala Lumpur for the 16th
Asia Oil & Gas Conference
and an honour to be invited to present.
AOGC has become a major annual event for the oil & gas
industry. I pay tribute to
PETRONAS, and in particular Dato’ Shamshul Azhar Abbas, for the
management and
organisation of the conference, along with co-managers the
Malaysian Institute of Economic
Research and The Conference Connection.
In the 26 years I have been in the oil and gas industry, I have
witnessed this dynamic
industry challenge the boundaries of technology and create
innovative commercial structures
that extended the reach of LNG.
For the next 10 years and beyond I do not see the pace of this
change slowing.
History has shown that the LNG industry has not only grown, but
is an engine for
considerable technological and commercial adaptation and
innovation.
What do I see as the catalyst for further evolution?
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2
1. Global demand for LNG has strong drivers, but Asian
fundamentals will continue to
underpin long term demand.
2. The need for Security of supply – and this has many forms –
will intensify.
Globalisation of the trade will grow and provide flexibility to
buyers and sellers this in
turn will encourage the use of LNG.
3. Demand for cleaner burning fuels will provide a greater role
for natural gas.
4. The industry’s ability to innovate whether through technology
or commerce. Gas
reserves are plentiful, but getting this gas to market remains
challenging. New gas
plays such as Coal Seam Methane and Shale gas will provide both
competition and
contributions to LNG supply.
These are the themes I’d like to examine today.
I’ll also take the chance to show you that Santos is a great
example of the new face of LNG
– in all forms of supply and uses of technology. But more of
that later.
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We know change will happen in the LNG world over the next 10
years and beyond. We only
have to take a quick look back on the past 30 years when the LNG
world changed from
stable point to point trade between a few buyers (mostly in
Japan) and a small number of
mainly Asian suppliers to what we see today.
The growth of the LNG industry over the last 30 years has been
remarkable – and has
transformed the energy markets of the 24 countries which rely on
liquefied natural gas for a
share of their fuel mix.
In 1980, LNG trades represented just 2% of global gas
consumption. By 2010, LNG trades
represented 10% of global gas consumption and are set to
increase further.
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3
My first taste of the LNG business was in 1980’s when I worked
on the shipping
arrangements for Australia’s North West Shelf project. The
parties spent months debating
whether ships would be built in France or Japan. Clearly with 8
Japanese buyers it was no
surprise the ships were built in Japan. However at that point in
time, there were no signs of
the soon to be mighty Korean ship yards.
The pace of change picked up in the 1990s, however the
conservative forces of LNG were
still in play. With oil prices at around $18/bbl, the LNG price
debate was around cents on or
off the constant, not about different indexation to oil.
However, in 1990 we saw the beginnings of bigger change with
Korea and Qatar entering
the LNG business and the first signs of LNG being traded away
from long term markets.
The 21st century really shook up the conservative image of the
LNG industry. Everyone fell in
love with China and as love struck sellers we said yes to
everything we were asked.
Traders entered the market attracted by the price arbitrage
between Asian and Atlantic gas
prices.
In the past decade we have seen: African LNG producers, floating
regasification, Chinese
ship yards, the might of Qatar and the rush to approve US import
terminals.
From this perspective it very easy to see that in this current
decade and beyond we will
continue to witness significant change in our industry. We have
already seen the first Coal
Seam Gas LNG projects sanctioned and recently the first floating
LNG project was approved
– all in Australia.
We will see new entrants and growing need to balance between
export and domestic gas
demands in supplying countries.
Wood Mackenzie forecasts that the global LNG trade will grow
from 218mtpa in 2010 to 345
million tonnes by 2020 – equating to a compound annual growth
rate of almost 5%.
This growth rate would require 72 mtpa of not yet sanctioned
capacity to be operational by
2020. And this does not include capacity required to offset the
decline from existing LNG
suppliers.
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Taking a closer look at the global LNG demand outlook, Wood
Mackenzie’s forecast has
fallen due to the boom in North American unconventional gas, but
Asian demand is proving
to be better than expected. From the 2008 prediction of over
400mtpa of LNG in 2020
suggestions are that we are more likely to see about 350mtpa
effectively a reduction in
CAGR from 8% to 6%.
As Fereidun Fesharaki commented in one of his bulletins “there
is no such thing as a smooth
curve in LNG”. Why…
• The tragic events in Japan this year made us realise that not
all factors which impact
the supply-demand outlook are predictable. The consequences of
the natural
disasters in Japan will add in the order of 10mtpa, and possibly
up to 20mtpa, to
Japanese LNG demand.
• The role of nuclear power is now being questioned. Who would
have thought six
months ago that Germany would shutdown all of its 17 nuclear
power plants by 2020.
Any decline in nuclear power generation is likely to increase
long-term demand for
natural gas.
• Not many predicted the impact US shale gas would have on the
US appetite for LNG.
The question now is whether there is more indigenous gas supply
from shale ready
to enter the market over the next decade. With countries as
diverse as China,
Argentina and Poland all assessing their unconventional
capabilities we are bound to
see an impact – the question is when and whether this indigenous
gas production will
compliment or offset LNG imports?
• Furthermore, the emergence of new demand centres, for example,
the Middle East,
which is expected to account for about 20mtpa of LNG demand by
2020 – this is a
seemingly apparent contradiction given the enormous natural gas
resources in the
region.
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However it is worth examining more closely why the Asian
region’s fundamentals will still be
the key driver for the growth of the LNG industry.
I believe there are 3 major factors at play:
(i) First, Asia’s energy needs will continue to grow. Asia is
the global growth engine. These
forecasts are from the Energy Information Administration, the
statistical arm of the US
Department of Energy.
These forecasts show that from 2007 to 2035:
• Asia is expected to account for 48% of global population
growth.
• For 52% of global GDP growth.
• And a remarkable 64% of growth in primary energy
consumption.
(ii) Secondly, I see that security of supply will become
increasingly important:
• Countries reliant on imported energy are aiming to diversify
their sources of supply,
minimise political risk and build closer, stronger relationships
with their suppliers
(iii) Lastly, in a carbon constrained world, natural gas has a
bigger role to play in reducing
power generation emissions and LNG is a key source of this
cleaner energy. For every
tonne of CO2 emitted in the production of LNG in Australia, four
tonnes of CO2
emissions are saved in Asia, if the LNG displaces coal to fuel
power generation. I don’t
believe we have yet to fully appreciate or price the
environmental advantages of gas
however we can expect this to become an increasing focus in the
coming decade.
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Whilst Australia ranks 14th in the world’s top proven gas
reserves holders, there are a
number of important factors to consider when evaluating it as an
attractive source of energy:
• Australia’s low sovereign risk and relatively stable fiscal
regime;
• Its proximity to the growing markets of Asia;
• Australia’s world-scale undeveloped conventional and
unconventional gas
resources; and
• The access to reserves and production which Australia offers
international oil
companies, thereby encouraging the LNG developments we see
today.
Right now Australia produces 20 million tonnes per annum, less
than 10% of the world’s
needs.
By 2016, we could see this increasing to over 60mtpa and by
2035, a third of all planned
production – from projects sanctioned or proposed – could come
from Australia. In the past
12 months there have been approximately 16mtpa of Coal Seam Gas
to LNG projects
sanctioned, in addition to 25mtpa LNG supply currently under
construction from Gorgon,
Pluto and Prelude FLNG.
Not all the planned LNG projects will be developed – in
Australia or elsewhere – but clearly
Australia’s significance in the global LNG marketplace is
expanding.
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Looking more closely at the Asian LNG markets we see three
distinct demand groups.
(i) The first group is the established LNG markets of Japan,
South Korea and Taiwan.
These countries are seeking security of supply and
diversification by fuel type. They
have effectively locked in LNG demand, growing at steady
incremental rates of
between 1% and 3% a year.
(ii) The second group is the growing mega-markets of China and
India.
These are markets that only kicked off less than 10 years ago
but are forecast to grow
at 10% per annum, and could soon be as significant as the
current established
markets.
(iii) The third group is emerging markets of South-East Asia:
Singapore, Thailand, Malaysia,
Indonesia, Vietnam and the Philippines.
This group of emerging buyers include some of Asia’s “bedrock”
producers who are now
becoming importers, as is the case with PETRONAS purchasing 3.5
mtpa from the
Gladstone LNG project in which Santos, PETRONAS, Total and Kogas
are partners..
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I’d like to say a few words on how Santos fits into this
picture.
At Santos our vision is simple: to be a leading independent
E&P company meeting
Australia’s and Asia’s energy needs. Our strategy is to safely
deliver our Australian base
business, grow our LNG business, and pursue focused growth in
Asia.
Santos remain Australia’s largest domestic gas producer. In Asia
we have gas projects
targeting domestic consumption in Indonesia, Vietnam, and
Bangladesh.
From this base you can see how Santos – a mid-sized company –
can leverage from its
strengths in gas supply and experience in Asia to grow into a
significant supplier of LNG to
the region.
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10
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The title to this slide is to hide the fact that I am going to
address a question I am often
asked.
I am often asked will LNG prices converge around a single
“market” price in the near future.
Whilst any future LNG exports from the US will impact trade
flows, I believe that Asia’s
demand for secure supplies from neighbouring sources will
preserve oil-linked prices for the
foreseeable future.
Oil-linked pricing of LNG has been the commercial driver
required to build real scale and
tackle challenging gas developments. Oil-linked pricing has
worked in Asia because buyers
are comfortable that oil is an established, well understood and
globally traded commodity.
Oil is often the alternative liquid fuel for many LNG importing
countries, so it makes sense to
the have LNG price linked to the substitute fuel price.
Producers also support oil-linked pricing. Strong prices are
required to underpin new
projects.
I appreciate the arguments around spot trade and price being set
at the margin, but I
strongly believe that convergence of the various regional hub
prices is still sometime away.
Although we are confident that the long-term LNG price will
remain linked to oil price for the
foreseeable future, the way in which LNG is traded has rapidly
evolved.
The spot market, and short term market, now account for around
20% of all traded LNG
volume. The volume, depth and liquidity of the short term market
give project proponents the
confidence to proceed with LNG supply projects without the need
to lock in long-term
customers for their entire output.
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11
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As this map shows, 30 years ago LNG trades were simple.
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As we can see the LNG market is deeper, busier and more liquid
than anyone would have
anticipated.
It is important to note this is a trade flow map. This picture
also demonstrates that many of
the trades are from market participants who are not physical
suppliers of LNG, but actively
trade LNG cargoes.
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12
Furthermore, we have suppliers who active trade a portfolio of
LNG supplies. Portfolio sales
allow LNG suppliers to:
• Participate in more of the value chain.
• Arbitrage the market and take advantage of the short term
market movements.
• Act as an enabler for future projects as it reduces reliance
on off-take agreements to
sanction projects.
Short term sales typically go to traditional established buyers
in Japan, Korea and Taiwan.
Spot sales flow to highest netback market, generally in North
and South East Asia.
The development of spot and short term trades have been helpful
to Asian buyers as a more
flexible way to balance demand and supply, however I do not
believe that buyers will be
comfortable with a total reliance on short-term supply. For
security of supply reasons, we
believe buyers will continue to look for long-term contracts to
meet the majority of their
needs.
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13
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On the supply side in Australia we have seen the rapid rise in
Coal Seam Gas exploration,
development and now production.
The rapid development of drilling and production technology has
caused a revolution in coal
seam methane (commonly known as coal seam gas or CSG in
Australia). This has resulted
in 16mtpa of LNG supply from CSG being sanctioned in the past
year and perhaps another
project may well be sanctioned later this year.
These projects must meet four key challenges:
1. First, accessing sufficient high-quality gas reserves.
2. Secondly, adopting an approach to upstream gas production
that enables efficient and
economic drilling and operation of a large number of wells
simultaneously.
3. Thirdly, managing the logistics of bringing a large number of
wells into production
ahead of the first shipments of LNG, then operating these wells
for at least 20 years
4. And finally, doing all this in a responsible manner, whether
it be in regard to water,
environmental management or genuine community engagement
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14
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The technical innovation I have referred to is not confined to
LNG production and export.
Advancements across the industry are delivering the next phase
of LNG evolution.
On the demand side, there has been a rapid rise in floating
reagasification storage, which
allows importing countries to rapidly establish import
facilities in approximately ~18 months
and connect gas directly into existing distribution networks, as
well as overcome potential
port access and community constraints.
Over the last six years, 13 floating regas units have come
online.
And, over the next four years, the number of operational
floating regas units will double.
The emergence of floating LNG with Shell’s sanctioning of the
Prelude development last
month, is one of the biggest game changers our industry will
see. FLNG will unlock stranded
gas fields, making these reserves commercially viable. At
Santos, we are confident our
Bonaparte LNG venture with GDF Suez will be another pioneering
project in this field.
-
15
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I suggest Santos is a good example of the changing face of
LNG.
With the widening LNG landscape and the changing roles of market
participants companies
without the scale of the majors or NOCs can still play an
important role in the LNG trade.
Santos has access to both the LNG liquefaction technology and
the conventional and
unconventional upstream gas reserves. . But in this complex and
very capital intensive world
we are fortunate to have great partnerships to bring these
projects to market.
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16
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• Looking ahead we will continue to see an evolving market
landscape
o Exporters will become importers
o Partnerships with National Oil Companies will become
increasingly important.
o We will see increased market liquidity and trade flow
complexities
o And, new technologies enabling the development of CSG, Shale
gas, floating
LNG and regasification and storage.
• Security of supply and energy policy will continue to drive
change.
o LNG exporting nations will balance their domestic gas market
needs with
export opportunities.
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17
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Our customers and partners will continue to play a fundamental
role in the transformation of
Santos from an Australian E&P company to a leading natural
gas producer providing energy
to Australia and Asia.
In conclusion, we believe natural gas offers a cleaner burning
fuel that’s available now and
affordable. Australia has a vital role to play in providing
natural gas to Asia.
I thank you for this opportunity to address the prestigious
Asian Oil & Gas Conference.
ENDS.
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18
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