Extract From today's afr re santos shortage of gas for train 2...

Extract From today's afr re santos shortage of gas for train 2 at Gladstone.

IMO This would open an opportunity for Armour if you take the view that the oil price will recover by the time the new pipeline is built and operational across it tenements to supply gas all the way to Gladstone.  

The opportunity for incentive pricing down the track would be Another reason why AEP would want to strongly retain the farm in agreement with Armour.

3rd PARTY GAS

A common concern of many that kicked the Santos tyres is that it will rely so heavily on third-party gas to fill the second LNG train that is being commissioned at its Gladstone project, and that is expected to ship is first export gas some time in the second quarter.

That Santos is long sunk investment ($US20 billion) on its Gladstone export platform but short the gas to keep the chillers full for 20 years sits arguably the biggest structural problem ahead of Gallagher.

Santos has long said that it could make money at Gladstone at an oil price of $US45 a barrel. Brent currently sits at $US35.30 a barrel and that is after three weeks of stuttering recovery in the index that sets LNG prices. So it would be fair to suggest, I think, that Santos' Gladstone footprint is struggling to generate free cash flow right now. So why introduce more gas when you are not generating even cash, let alone a profit, from the tonnes you are currently producing.

One competitor suggested that if oil prices do not start trending back through the $US50 a barrel range to the $UD65 a barrel that Shell and others now imagine is the long-run price, then Santos should arguably scrap the second train altogether.

This logic is informed, in part, by Santos' resources issue. The production characteristics of coal-seam gas are the same as shale. You need to keep drilling new wells just to sustain existing production. You need to drill a whole lot more to increase it.  So the unconventional producers need to generate free cash flow to just stay in business.

If Santos is not sustaining its drilling program then it will need to acquire ever more third-party gas. To get access to new and deep gas pools it will need to pay an incentive price to bring supplies to market. That means likely paying higher prices than  competitors who own supplies enough to feed their own machines.

At that point the cycle of pressure on margins and cash flow becomes painfully self-sustaining. Working out how to break that uncomfortable nexus should oil's depression continue into 2017 sits Gallagher's first and biggest challenge.



Read more: http://www.copyright link/business/...price-pressures-20160201-gmiw7q#ixzz3ywaQgK6c
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