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Santos Takes Final Investment Decision on Pikka; 1st Half Profit Surges

By David Winning

 

SYDNEY--Santos Ltd. approved the development of the Pikka oil project in Alaska, illustrating how the Ukraine war is providing impetus for energy companies to develop alternative sources of supply to Russian crude.

Santos said it expects first oil from Pikka in 2026, with gross production forecast at a rate of 80,000 barrels per day. The company said its share of capital expenditure would be around US$1.3 billion and the project's first phase has an estimated internal rate of return of 19% based on a long-term oil price of US$60 a barrel.

"Global oil and gas markets are seeing increased volatility and countries are looking to diversify their supply sources away from Russia," said Chief Executive Kevin Gallagher.

Russia currently produces 18% of the world's natural gas and 12% of global oil supply, Mr. Gallagher said, citing data from the International Energy Agency.

After weeks of infighting, the European Union in early June approved a ban on insuring shipments of Russian oil alongside a ban on imports of Russian oil that is set to go into effect this later year. Still, many developing countries as well as China and India continue to purchase oil from Russia.

"Low-carbon oil projects like Pikka Phase 1 respond to new demand for OECD supply and are critical for global and U.S. energy security, that has been highlighted since the Russian invasion of Ukraine," Mr. Gallagher said.

Santos acquired the Pikka project through its takeover of Oil Search, which had previously run a process to bring in new investors to advance the project. Some analysts had suggested Santos could look to sell the project given its location in an environmentally sensitive region.

On Wednesday, Mr. Gallagher said Pikka would be a net-zero emissions project, which would use existing infrastructure, including the Kuparuk transportation pipeline and the Trans-Alaska pipeline system.

Details of the final investment decision on Pikka were provided by Santos alongside a more than tripling in half-year profit as the surge in global energy prices coincided with a major boost to output from assets acquired through its takeover of Oil Search.

Santos said its net profit totaled US$1.17 billion in the six months through June, up from US$354 million a year ago. Directors of the company declared an interim dividend of 7.6 U.S. cents, up from a payout of 5.5 U.S. cents at the corresponding stage of 2021.

The result illustrates the early benefits of Santos's takeover of Oil Search, which has deepened the company's footprint in Papua New Guinea and increased its exposure to natural gas that many experts believe will be an important transition fuel as economies shift away from more polluting energy sources and pivot toward renewables.

Santos's oil and gas production rose by 9% to 51.5 million barrels of oil equivalent in the half-year period, despite several planned shutdowns of assets, including at PNG LNG in Papua New Guinea and Darwin LNG and the Cooper Basin in Australia.

At the same time, Santos benefited from higher energy prices as the Ukraine war led many countries to pare purchases of Russian oil and natural gas or stop taking shipments entirely. Santos's crude oil fetched an average price of US$119.55/bbl between April and June, up from US$113.09/bbl in its fiscal first quarter. The average realized price for its liquefied natural gas lifted to US$14.66/mmBtu in the second quarter, nearly double levels of the same period a year ago.

That drove a sharp rise in sales revenue to US$3.8 billion in the six months through June, from US$2.04 billion a year earlier.

However, Santos's bumper profit also coincides with active debate in Australia around whether producers are doing enough to ease a shortage of natural gas along the country's east coast, which has driven up energy bills for households and businesses.

Earlier this month, the Australian Competition and Consumer Commission forecast an economically damaging shortfall in the east-coast gas market in 2023 and urged the federal government to work with producers to immediately redirect liquefied natural gas intended for export.

The ACCC report led the Australian Petroleum Production and Exploration Association to say the industry would ensure supply next year, pointing to a significant volume of uncontracted gas.

Still, some analysts expect the Australian government to pull a trigger that requires producers to commit to more domestic gas supply. That could affect Santos, which operates the GLNG gas-export project in Queensland state.

 

Write to David Winning at david.winning@wsj.com

 

(END) Dow Jones Newswires

August 16, 2022 19:49 ET (23:49 GMT)

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