"In the future, Santos and the GLNG project will be a case study for university students on how to destroy shareholder value," Argonaut oil and gas analyst Philipp M-O Kin, who toured the GLNG site multiple times when covering the oiler for RBS, told Energy News.
In fact, M-O Kin said the circumstances that led up to Scepter Partners' rejected $7.14 billion bid for Santos all started on "that fateful day" when the final investment decision was made on the $18.5 billion project in January 2011.
While outgoing Santos CEO David Knox lauded the company for delivering GLNG - one of the projects the oiler decided to keep in its asset purge - on time and on budget, M-O Kin said in a research note that this was not actually the case.
"It has to be said that the project was not within budget, particularly taking into account the $US2.5 billion ‘cost acceleration' along with about $2.5 billion in ‘non-project' capital expenditure over the initial $16 billion cost estimate," M-O Kin said.
M-O Kin started his career in Shell's economics and business planning division before progressing through various roles to the position of Browse asset economist.
He said that when FID was made for GLNG in January 2011, the $16 billion cost quoted was only "pre-risked first start up" and not lifecycle capex.
"The market did not assume that the three Curtis island LNG projects (Queensland Curtis LNG, GLNG and Australia Pacific LNG), which were being built next to each other and at similar times, would not share infrastructure like jetties, and dredging, and therefore costs," M-O Kin said.
Further exacerbating Santos' GLNG woes was the sharp slump in the oil price occurring just as the company completed its capital spending of $US18.5 billion ($25.5 billion) as production was ready to commence.
The analyst said the level of debt Santos would have on the balance sheet post GLNG start-up was about $8.6 billion, with net debt of $8.2 million.
Santos defended the project's economics, especially considering it's free cash flow positive at $US40/bbl.
"We are proud to have delivered GLNG on time and within the $US18.5 billion budget," the spokesman said.
"It is the largest project we have ever undertaken as a company and is a testament to our dedicated employees and contractors, the support we have received from governments, local communities, our customers and shareholders, as well as the strong relationships we enjoy with our joint venture partners."
Santos announced in June 2012 that $US2.5 billion of GLNG's upstream capital expenditure would be brought forward from the post-2015 period. The revised estimated capital cost was $18.5 billion to the end of 2015.
The additional spending was brought forward, the timing of cash-flows changed but not the absolute quantity of expenditure.
This brought forward capital funded upstream field development in the Fairview and Roma areas previously planned for post-2015.
Enough gas?
M-O Kin said there were also still questions surrounding the availability of reserves for GLNG, as at time of FID, Santos did not have enough gas reserves in the ground to cover the 7.8 million tonnes per annum output for 20 years, which was generally the economic lifecycle of LNG plants.
"Due to coal bed methane to LNG never being done before, the market did not appreciate for the lifetime of the project an estimated 9000 wells were required just for GLNG project delivery," he said.
"Due to the small recovery factors of CBM wells, drilling would be an ongoing capex item throughout the lifetime of the project, which is in stark contrast to traditional LNG projects were the [roughly] 80% of the capital costs are spend before production."
The Santos spokesman countered by saying that GLNG now has 6000 petajoules of 2P reserves, including the project's share of non-operated fields.
"When you add committed Santos portfolio and purchased third party gas. The total is about 8000PJ. Including 2C contingent resource brings the total to 9000PJ," the spokesman said.
It is understood that about 8000PJ would be needed to fill two trains for 20 years.
RBC Capital Markets oil and gas equity analyst Ben Wilson said this week that while his firm considered GLNG's operational risk to be low given the project has access to a large quantity of third party gas, "it is possible that delays during the elongated ramp-up phase may occur".
As the dust was still settling on Santos' post-strategic review announcements of $3.5 billion raised towards paying down its debt, Credit Suisse analyst Mark Samter also raised concerns about future gas supplies for GLNG.
"A la Origin, post the raising, Santos remains highly leveraged even if the credit rating is no longer at risk," Samter said, post-strategic review announcement.
"Our new NPV falls to $5/share. We do note, with some caution, that we now carry $A0.81/share for growth assets (having removed the extra risking on growth assets for lack of funding) and $4.20/share for GLNG, where we remain concerned about gas supply into the future (even more so with capex reduced)."
M-O Kin also re-iterated that perhaps the single most important variable that affected Santos was the adverse move in oil prices.
"During FID, Santos touted the benefit that the LNG was sold on oil-linked contracts. As the price of oil fell, so did the Santos' valuation," M-O Kin said.
"Whilst the falling oil price hurt the entire sector, Santos was particularly affected due to the diminishing revenues expected from GLNG - and the rest of its assets - which called into question its ability to pay the $8 billion.
"The knock-on effect of this was that the market anticipated a capital raising which further depressed the share price."
With this in mind, M-O Kin, like some other analysts, believes the Scepter story is not over yet.
"We believe that a revised bid is possible, particularly looking at the party involved and its financial backing," he said.
"Should a revised offer of $7 or above cash be made, we view it would be difficult for Santos to reject."
Following the bid announcement, Santos' share price increased 16% to $6.32.
Wilson also said this week that while declining oil prices may affect Santos more negatively than peers, the opposite is true in a rising oil price environment.
Standard concerns
Standard & Poor's Ratings Services also said on Monday that Santos would still be investing a significant amount of capital in the GLNG project in relation to completion of Train 2 and associated facilities, as well as the development of the upstream gas supply over the life of the project and associated infrastructure.
"GLNG will also be seeking to acquire significant volumes of gas supply from third party sources over the life of the project to supplement long-term gas supplies from the GLNG joint-venture gas fields," S&P said.
"In the short-term, the rating outlook remains negative, reflecting the ramp-up and execution risk associated with its GLNG project.
"The rating may also come under pressure if the company fails to alleviate unanticipated large cost overruns or delays at its GLNG project.
"A further material decline in our oil price expectations could also pressure the rating. We could change the outlook back to stable if we expect that GLNG will deliver cost competitive production in line with its plans, and the credit metrics continue to remain in line with our expectations.
"A return to a stable outlook would also be dependent on confirmation of Santos' future operating strategy under the new CEO, and the company's long-term business focus."
