The A$3.6bn ($2.7bn) Narrabri gas project in northern New South Wales (NSW) is emerging as a key part of the Australian government's gas-driven economic recovery plan. But whether its operator, Australian independent Santos, will be prepared to sanction with the sizeable investment at a time of cutbacks elsewhere is less clear.
NSW's Independent Planning Commission gave conditional approval for Narrabri this week, leaving the way clear for Santos to commit to its development.
Narrabri has become increasingly politicised in recent years, with the conservative NSW and federal governments seeing a chance for Australia's most populous state to reduce its reliance on gas from neighbouring Queensland and Victoria.
But the project is controversial because it lies beneath the Pilliga state forest and will require a significant number of trees to be cut down to allow access to its coal-bed methane (CBM) reserves, which are located 800-1,200m below ground.
The 150-200 TJ/d (4mn-5.34mn m³/d) project is a key plank of Canberra's gas-fired economic recovery plan, which includes plans for a government-funded 1,000MW gas-fired power plant in NSW. Narrabri is also the focus of a separate federal-state agreement under which Canberra pledged A$960mn to support new gas supplies in NSW.
Canberra wasted little time in reaffirming its support for Narrabri this week. The NSW approval backs the government's gas-fired recovery plan and unlocks supply to help drive down prices, Australian energy minister Angus Taylor said.
The project has a chequered history. Santos walked away from Narrabri eight years ago after NSW changed rules around CBM and hydraulic fracturing, only three years after it acquired the project through its purchase of Eastern Star Gas, which had originally planned to use Narrabri gas as feedstock for a 1mn t/yr LNG project at Newcastle. It brought the project back into its portfolio as the supply outlook tightened.
Santos may make a final investment decision on Narrabri in the July 2021 to June 2022 financial year, and has previously included gas from the project in its 2025 production target.
Cost challenges
The cost of delivering gas to consumers will be key to determining the economics of Narrabri. A new pipeline will be needed to take supplies from the Gunnedah basin to consumers in other parts of NSW and eastern Australia. Australian pipeline operator APA said in 2017 it planned to build a A$500mn, 450km pipeline linking Narrabri to its bi-directional Moomba-Sydney pipeline, which can carry 489TJ/d to Sydney and 120TJ/d to Moomba.
This means gas from Narrabri could still go to Moomba in South Australia, where it could be transported to Wallumbilla in Queensland and in turn exported to Gladstone, where three LNG plants are located. But Santos said all the Narrabri gas will be sold to domestic customers.
And Canberra's gas-fired recovery plan is based on the notion that more gas production will cut prices of the fuel, a view that is not shared by gas and power regulator the Australian Energy Market Operator (Aemo). Narrabri's operating cost, including tax and royalty expenses, is likely to equate to A$7.28-A$9.36/GJ ($5.18-6.66/mn Btu), according to Aemo estimates.
This is well above the most recent Argus natural gas Wallumbilla index assessment of A$5.06/GJ. The Australian Competition and Consumer Commission estimated that contract prices offered by producers in eastern Australia were at around A$8-11/GJ earlier this year.
Santos has so far signed three non-binding supply agreements for Narrabri for an estimated 75TJ/d, or between a third and half of its expected output.
Santos, which owns 80pc of Narrabri, may have another customer through the other shareholder in the project - Australian utility EnergyAustralia, which is owned by Hong Kong energy and infrastructure group CLP. EnergyAustralia is assessing whether to develop 1,000MW of gas-fired power capacity in Australia and expects to decide this year on the first of the proposed power plants, the 300MW Tallawarra B in NSW.
Santos may have sufficient customers for Narrabri gas given it has government support, but will need to reduce production costs to make the project economic. The company cut group production costs by almost 13pc between 2016 and the first half of 2020, but expects average upstream costs to rise again to an average of $8.50-8.90/boe this year following its purchase of ConocoPhillips' northern Australia assets.
Santos will need to spend an estimated $2.8bn on its share of Narrabri, based on the current project costs, adding to its other investment plans. Its key project is the $4bn Barossa gas backfill project offshore the Northern Territory that will provide feedstock for the 3.7mn t/yr Darwin LNG venture. It also plans to develop its 80pc-owned A$2bn Dorado oil project offshore Western Australia and is a partner in the P'nyang gas field in the western highlands of Papua New Guinea (PNG), which is earmarked to provide feedstock for a proposed third train at the 6.9mn t/yr PNG LNG venture. Santos estimates its share of costs for the third PNG LNG train at $300mn-$400mn.
The company put all investment decisions on hold in March - and with any sustained price recovery still too early to forecast given the lingering impact of Covid-19 on global energy demand, Narrabri will have to compete with other projects Santos in a challenging outlook.
