Santos faces court action, but soothes with stellar quarter

PERTH (miningweekly.com) – The Australian Energy Regulator (AER) has started proceedings in the Federal Court against oil and gas giant Santos, alleging breaches of important record-keeping obligations in the National Gas Rules relating to the Day Ahead Auction for gas pipeline capacity.

The Day Ahead Auction started in 2019 and was designed to improve competition in the gas market by providing access to contracted but unused capacity on gas pipelines. The AER alleges that on 4 701 occasions between March 2019 and June 2021, Santos failed to keep the required records of its material renominations for the Day Ahead Auction across six different auction facilities, contravening the rules of the National Gas Rules.

AER board member Justin Oliver said these record-keeping obligations are critical for transparency and reinforced calls for gas market participants to have the necessary checks and balances in place to maintain the Day Ahead Auction.

“The Day Ahead Auction is vital to moving gas between markets on the east coast and relies on market participants providing accurate information to the Australian Energy Market Operator to operate efficiently.

“This includes maintaining contemporaneous records to enhance the AER’s ability to monitor, investigate and ensure compliance with the National Gas Rules in the wholesale gas market,” Oliver said.

Santos told shareholders that the alleged record-keeping issues had no impact on supply or price in the east coast domestic gas market.

“Santos always acted, and will continue to act, in good faith in respect of nomination and renomination behaviour in the domestic gas market, and there are no allegations otherwise. The National Gas Rules were introduced on 1 March 2019. The process to update compliance systems is complex, and in recognition of this the AER issued a discussion paper on guidance for record-keeping under the rules in April 2023.

“Despite recognising this complexity, the AER instituted a policy of strict compliance from day one (1 March 2019). This is contrary to the approach taken for other gas market regulations,” Santos said in a statement on Thursday.

“Santos is disappointed proceedings have been instituted. The conduct alleged arises from record keeping of nominations and renominations over a period of around 27 months. The number of occasions alleged by the AER is of limited relevance to the outcome of these proceedings. Factors which will be relevant include the fact that there has been no impact on pricing or supply and the steps Santos has taken to put in place robust and best practice compliance systems that have been operating effectively since June 2021.”

The company told shareholders that it continuously reviews and improves its business systems and processes to comply with the National Gas Rules and other regulations that apply to its domestic gas activities, and noted that the company was confident it had a robust and effective compliance management programme in place.

Meanwhile, Santos on Thursday reported sales revenue of more than $1.4-billion in the third quarter ended September, up 7% on the previous quarter, as production volumes in the same period increased from 22.8-million barrels of oil equivalent to 23.3-million barrels of oil equivalent.

Sales volumes in the September quarter also increased to 24-million barrels of oil equivalent, compared with the 23.3-million sold in the June quarter.

Santos MD and CEO Kevin Gallagher said the underlying business performance, combined with a strong focus on operational excellence, delivered yet another strong quarter.

“Free cash flow of $1.6-billion year-to-date positions the company well to deliver shareholder returns, backfill and sustain our existing business, while also investing in our major projects and progressing our decarbonisation plans.”

Santos’ Western Australian assets contributed 5.2-million barrels of production during the quarter under review, with the Cooper basin assets contributing 3.4-million and the Queensland and New South Wales assets contributing 3.5-million barrels. Production from Papua New Guinea reached 10.6-million barrels, with Northern Australia and Timor-Leste contributing 0.6-million barrels.

“Over the last quarter, Santos completed the First Nations underwater cultural heritage assessment required prior to pipelaying at Barossa. In response to the General Direction issued by the regulator, the independent expert concluded after extensive research and interviews that ‘there were no specific underwater cultural heritage places along the planned Barossa pipeline route that may be affected by the activities’ covered by the pipeline environmental plan,” Gallagher said.

“The Santos Energy Solutions business is advancing with the Moomba carbon capture and storage (CCS) project; it is now 75% complete and on track for startup in mid-2024. This project will be the only CCS project in Australia that has currently qualified to generate Australian Carbon Credit Units for carbon dioxide (CO₂) injected and stored in Cooper basin reservoirs. Direct Air Capture field trials at Moomba will also begin this year, with the unit having arrived onsite in September.”

“We were also pleased to see further positive momentum for our Bayu-Undan CCS project with legislation to implement the London Protocol’s cross-border provisions for CO₂ transport and storage passing the House of Representatives and Senate Environment and Communications Legislation Committee recommending the Bill will be passed.”

Capital expenditure (capex) on Santos’ major projects, including those of Santos Energy Solutions, is expected to reach between $1.5-billion and $1.6-billion during 2023, with capex on sustaining production, including decommissioning activities, expected to reach around $1.2-billion.

Looking at the full 2023, Santos’ production guidance has remained unchanged at between 89-million to 93-million barrels of oil equivalent, with sales volumes targeted at between 90-million to 100-million barrels of oil equivalent.