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Key Findings

At the Santos annual general meeting, concerned shareholders sought a resolution on climate change and its effects on oil and gas producing companies.

Post pandemic, as consumption patterns permanently and irrevocably change, fossil fuel producers face financial risks in vying for shares in a smaller market.

As renewable energy gains customers, debt and equity markets will direct finance away from fossil fuels.

A couple of surprising things came out of Australian oil and gas producer Santos’s annual general meeting last week.

A shareholder resolution was put to the board over climate change

First, the chairman highlighted that the company had pretty radically cut the capital expenditure budget, delaying the final investment decision on the $7 billion investment in the Barossa field offshore the Northern Territory in Australia. He also announced it had actually withdrawn from fracking in the Northern Territory for the rest of 2020. Who knows when they will resume that exploration project. And the Independent Planning Commission’s decision for the Narrabri project in New South Wales looks to have been delayed until late in 2020.

A third really interesting thing was that a shareholder resolution was put to the board over climate change, and the board recommended against shareholders voting for this resolution. Between 43% and 46% of shareholders had voted for the climate resolutions.

Santos don’t really have a choice.

The first resolution they voted for was a request that the board disclose details of how its investments and capital expenditure aligned with the Paris Agreement goals, and to disclose Santos’s emissions targets. And a big slab of shareholders voted for a request that the board commission a review of its memberships of the likes of the Queensland Resources Council and APPEA, the peak body for oil and gas companies. It’s unusual in a company for a board to recommend against voting for a resolution while there is a large number of shareholders voting for that resolution, as was the case here. Clearly shareholders are very concerned about climate change and the effects of this on oil and gas producing companies.

Santos – and other gas companies that are looking at what happened at the Santos AGM – don’t really have a choice.

SANTOS HAS A BIG NUMBER OF SHAREHOLDERS CONCERNED ABOUT CLIMATE CHANGE; particularly of note as Santos has an anchor shareholder (owner of 30% of the company) that would have voted for the resolutions. So, Santos has a large bloc of institutional investors clearly dissatisfied with the direction the board is taking, an issue it must deal with. You can’t have that number of shareholders unhappy with your performance and continue on with the old ways.

COVID-19 has spurred a fall in demand

At the moment Santos has a pretty aggressive, it could be said, expansion policy, looking at producing more and more gas at a time when methane emissions are increasing rapidly around the globe. Methane accounts for 25% of all greenhouse gas emissions – it’s a particularly powerful greenhouse gas. Santos is talking about expanding, and the shareholders are saying, well, we’ve got a bit of a problem with that. 

Late last week there was a bit of rally in the oil price up to US$30/barrel for Brent crude, up from the $24 level. That was on the back of President Trump talking about a possible agreement with the Russians and the Saudis.

I think it is far too early for anything like that to occur. If you look at the history, the Saudis effectively started producing to their maximum ability before the COVID-19 crisis that we’ve seen in the oil markets, spurring a fall in demand. Demand won’t return to the old levels when things normalise post-pandemic. When you have a major crisis like this, people’s consumption patterns permanently and irrevocably change.

Globally, we are already seeing more bankruptcies

FOR OPEC AND OTHER OIL PRODUCING NATIONS, such a change will make a resolution of their current market share war that much more difficult to achieve, because they will be arguing over a share of a smaller pie. There’s simply a smaller amount of oil and gas consumption that these companies and nations will be arguing over, and it’s going to make a resolution, I believe, more difficult, not easier.

Globally, we are already seeing more bankruptcies. Last week in the U.S., Whiting Petroleum, a pretty sizable shale fracking company, went broke. We also saw Callon Petroleum call in the merchant bankers to try to restructure its debt; it’s now staring down the barrel of bankruptcy. And we will see more and more companies in the U.S. go bankrupt.

They simply can’t operate at the current prices and make money in the U.S. The industry as a whole hasn’t made money for the past decade at the free cash flow level. And basically, the equity and debt markets – that’s the bankers and the people that buy the shares of these companies – have lost patience with the industry. 

In Australia at the moment, companies can’t really make money when oil is below $35/barrel. They are scrambling to try and cut costs. They are going to struggle with current oil prices.

We have already seen a turn in the energy markets, in terms of recovery, towards more clean energy investments. We’ve got Origin and Santos pulling back on capital expansion projects yet, in the renewables space, they are forging ahead.

We have already seen a turn towards more clean energy investments   

Acciona, the big Spanish company, last week announced one of the largest wind farm investments in the world in Queensland. That’s a big move to give a $1.96bn final investment decision in a very uncertain environment. We have also seen the old Kidston gold mine pumped hydro and solar project in Queensland sign a power purchase agreement with Energy Australia. That looks as if it is going to go ahead in the short-term, now that the project has locked down a customer.

WE ARE SEEING RENEWABLES PROJECTS GO AHEAD at the same time as we are seeing oil and gas companies withdraw from projects.

The reason for renewables projects going ahead is that their largest cost is finance, and financing costs have fallen. If you have a company that can get someone to buy its electricity, the project will go ahead.

Two things are restricting renewables in Australia: getting connection to the network, so there are network constraints, and getting a customer. If you get those two sorted out, you will find that projects will go ahead. The Queensland government is helping the Kidston gold mine project get a better connection.

So these projects – these large investments at scale – are going ahead.

Bruce Robertson is IEEFA’s gas/LNG analyst.

This is an excerpt from an interview with Bruce Robertson that aired on 3 April 2020.


Related articles:

Auditors take note – Santos’ accounts misleading since 2014

Origin pulls the plug on gas exploration in the Northern Territory. Who’s next?

Why more gas won’t help Victoria

What does the oil price crash mean for the Australian gas industry?

Volkswagen lied about emissions from their vehicles, and the gas industry is also lying about their emissions

Bruce Robertson

Bruce Robertson has been an investment analyst, fund manager and professional investor for over 36 years. He has worked with Perpetual Trustees, UBS, Nippon Life Insurance and BT. He has appeared as an expert witness before a number of government enquiries into energy issues.

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