26
Jan

‘They are dreaming’: Why Santos boss Kevin Gallagher still believes in oil and gas

In the final months of 2021, when world leaders were gathering in Glasgow pledging reduce or offset the use of planet-heating fossil fuels, an untimely problem was beginning to unfold: prices for coal and gas hit all-time highs.

It happened as economies were re-emerging from the worst of the COVID-19 crisis faster than anyone was ready for, lifting energy demand ahead of the Northern Hemisphere winter when more energy is needed for heating homes. Meanwhile, coal and gas stockpiles were running low, output had been curtailed from key suppliers including Russia, and buyers started scrambling to secure cargoes they could import by sea. Before long, power shortages in China were forcing factories to shut down.

For ASX-listed oil and gas producers Santos and Woodside Petroleum, the rising price of liquefied natural gas (LNG) – Australia’s third-biggest export – has translated to record December quarter sales revenue. One-off spot LNG cargoes in Asia, which were trading at less than $US2 ($2.79) per million British thermal units during the pandemic-led crash of 2020, surged above an unprecedented $US50 in October and remains above $US30 today. The benchmark Brent oil price has risen to $US88 a barrel, its highest in several years.

While the immediate trigger for spiking energy prices may have been multi-pronged, Santos managing director Kevin Gallagher says what it shows is the result of “five years of underinvestment in the supply side of our industry”.

“That’s a consequence of a number of things… two oil price crashes and a global pandemic – and, I’d have to add, activist pressure and government policy,” he says.

“I think what you’re seeing now is a bit of a realisation globally: there is nothing out there to replace fossil fuels for a long time.”

The burning of fossil fuels including coal and gas represents the biggest hurdle to achieving “net-zero” emissions targets, under which governments are vowing to eliminate or offset the greenhouse gases they release into the atmosphere to avert catastrophic levels of global warming.

While backers of natural gas describe it as a necessary “transition fuel” in the green power shift, as a less-emitting alternative to coal that can keep energy reliable and affordable in periods when weather conditions for wind and solar are unfavourable, the role of gas is increasingly under question. Scientists and climate advocates insist it remains a heavy source of emissions and its role must be urgently reduced not expanded.

In the lead-up to COP26, United Nations secretary-general Antonio Guterres said the latest Intergovernmental Panel on Climate Change (IPCC) report on the dramatic effect of human-induced climate change “must sound a death knell” for fossil fuels “before they destroy our planet”. The International Energy Agency, too, had calculated that no new oil and gas fields can be developed in order to keep the planet’s heating within 1.5 degrees, while Japan and Korea, two countries that accounted half of Australia’s LNG export earnings in 2020, outlined ambitions to start reducing gas from their electricity mix this decade.

However, according to Gallagher and other executives in the industry, the energy crunch in Europe and Asia is a reminder that consumption of oil and gas cannot be replaced with the flick of a switch, and traditional fuels will be required for some time even as efforts to build out more renewables and develop cleaner alternatives accelerate.

“Unless you can replace us tomorrow with some new green fuel that we don’t know what it is today, then the focus should be on developing energy that’s affordable and cleaning it up by reducing emissions until alternatives are viable and affordable,” he says. “Trying to do everything at the one time when that viable alternative is not available is leading to what you’re seeing right now – prices going through the roof globally.

It’s a view that was echoed last week by the $US10 trillion investor BlackRock, the world’s biggest asset manager, which has been dumping stocks in thermal coal miners but retaining shares in energy producers including Santos and Woodside.

A growing number of institutional investors, including BlackRock’s clients, are increasingly querying the role of gas in the clean-energy transition and have been accelerating a withdrawal from the industry, pushing the cost of capital higher. The intensifying pressure has triggered a wave of merger-and-acquisition activity across the sector, with Santos and Oil Search last year agreeing to merger into a $21 billion industry juggernaut, telling shareholders that having greater size and scale would be essential to funding future projects as the energy transition “sharpens”. Woodside, meanwhile, has agreed to buy mining giant BHP’s global oil and gas division.

But BlackRock chief Larry Fink, in his annual letter to CEOs, said he did not believe “simply passing carbon-intensive assets from public markets to private markets” would get the world to net-zero.

“Foresighted companies across a wide range of carbon-intensive sectors are transforming their businesses, and their actions are a critical part of decarbonisation,” Fink said. “We believe the companies leading the transition present a vital investment opportunity for our clients and driving capital towards these phoenixes will be essential to achieving a net-zero world.”

The letter drew immediate criticism from campaigners, who point out that it is out of step with the urgent action climate science clearly says is needed to arrest global warming. Gallagher, on the other hand, thinks Fink is “spot-on”. “The industry that will lead this transition is, in fact, the oil and gas industry,” he says, pointing out that Santos is pursuing plans to increase investments in emissions-reduction technologies including the Moomba carbon capture and storage (CCS) project in South Australia and lower-carbon hydrogen and ammonia plants.

“We are supplying fuels and energy to most of the world’s users today, and we are used to mega-projects spending trillions of dollars globally every single year building these projects,” he says. “If someone thinks some new set of project builders is just going to arrive from somewhere else with trillions of dollars to start building some new energy infrastructure globally … they are dreaming.”

 

Extracted from The Sydney Morning Herald