Santos pipeline faces uphill battle despite legal victory

Hello and welcome back to Energy Source, coming to you today from New York and Sydney, Australia.

ExxonMobil has warned the EU that it plans to withhold billions of dollars in climate-related investments unless Brussels slashes environmental red tape that it alleges is causing the “deindustrialisation of the European economy”.

The US oil major told my FT colleagues in Brussels that “recent developments in Europe have not instilled confidence in long-term, predictable policies”. And despite looking at some projects in the EU, Exxon has spent very little of its $20bn decarbonisation budget in the region.

The criticism comes at a difficult time in Europe, where high energy prices following Russia’s full-scale invasion of Ukraine and a weak economy have prompted a vibrant debate about the offshoring of heavy industry.

I spent last week digging though spreadsheets detailing US, European and Chinese capital investment data, which shows how German companies are flocking to the US in search of a strong economy and lucrative tax breaks. German groups announced a record $15.7bn of capital commitments in US projects last year, dwarfing the $5.9bn pledged in China, their largest trading partner.

But our main item today takes us Down Under where our Australia and Pacific correspondent Nic Fildes investigates gas major Santos’ Barossa pipeline project and its crucial role in supplying liquefied natural gas to Asia. — Jamie

Santos’ Barossa gas project faces doubts despite legal win

G’day from Sydney.

US natural gas prices may be plunging but global demand for LNG is set to surge 50 per cent by 2040, according to Shell, as more countries, particularly in Asia, transition away from coal. 

One of the significant suppliers of LNG to Asia is Australia, whose vast gas deposits are fed into countries including Japan and South Korea, driving strong economic ties between the two regions.

Yet new gas projects are meeting tougher opposition these days, leaving Australia’s developers facing a tougher sell. Here we look at the Timor Sea development being led by Santos, which has faced an uphill battle to get it off the ground. 

Most people associate Barossa with the South Australian valley that produces a fair portion of Australia’s best wine. Yet the name has also been used for a gas pipeline more than 3,000 kilometres to the north in the Timor Sea, which has given its developers severe hangovers over the past two years. 

The Barossa Project is a crucial development for Santos, the A$24bn ($15.7bn) Adelaide-based company that traces its roots to the 1950s. The project has taken centre stage in Australia for a variety of reasons, ranging from environmental and indigenous community opposition, to the country’s reputation as a reliable LNG exporter, to what value can be placed on a tricky development in a consolidating market. 

The Barossa Project — which counts South Korea’s SK E&S and Japan’s Tokyo Electric Power and Chubu Electric Power as sizeable investors alongside Santos — intends to pipe gas almost 300km from the Timor Sea to a terminal in Darwin to prepare it for export. 

The project was held up by a challenge from the local population of the Tiwi Islands whose “sea country” the pipeline passes through. 

Santos prevailed in court in January, when a judge ruled that arguments that the pipeline would disturb and anger the spirits of Ampiji, a rainbow serpent, and Jirakupai, or the “Crocodile Man”, had not been persuasive. 

That provided some good news for Santos management which only two months earlier launched a strategic review following an attack by a shareholder activist. Santos thus entered talks with Woodside, its larger Perth-based rival, over a merger to create a $52bn national champion in Australian gas exploration and export.

The court ruling meant Santos could proceed with Barossa, albeit with a delayed start date in the third quarter of 2025. Analysts, some of whom had suggested a “scrap value” tag was put on Barossa, had expected much worse.

Madeleine King, Australia’s resources minister, was soon trying to ease concerns in Asia over Australia’s role in the global energy supply chain. “As we look to the future, I want to assure our friends in Japan that Australia will remain a trusted and reliable partner on gas,” she told an audience in Tokyo in late January, citing Barossa as a LNG project that Australia would bring “to fruition”.

Yet Santos is not raising glasses just yet. Its talks with Woodside collapsed. Analysts painted a “tale of two cities” scenario whereby Woodside earned praise for its discipline in not pursuing a deal some of its shareholders did not support while Santos was back under pressure over how to create value from a disparate asset base stretching from Alaska to Papua New Guinea via the Timor Sea. 

And despite the court win, financing could remain an issue for building Barossa. K-SURE, the South Korean government export credit agency, has withdrawn insurance needed to underwrite SK E&S’s investment in the Timor Sea project. 

Korean environmental group Solutions for Our Climate said that the rare withdrawal of the insurance agreement showed that K-SURE had “lost confidence” as Santos and SK E&S had failed to meet the deadline to get the project back on track.

Saul Kavonic of MST Marquee research argued that Santos had plenty of growth potential but it could continue to languish if it doesn’t start to execute well. ConocoPhillips and Total have been mentioned as potential bidders but the Woodside talks did not flush out any rival offers, meaning a break-up of Santos could be on the cards. (Nic Fildes)

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Energy Source is written and edited by Jamie Smyth, Myles McCormick, Amanda Chu and Tom Wilson, with support from the FT’s global team of reporters. Reach us at energy.source@ft.com and follow us on X at @FTEnergy. Catch up on past editions of the newsletter here.