It was the last thing that Santos needed after receiving a series of bad reviews from stock market analysts about its failure to grow its reserves of gas.
Last Saturday, The Sydney Morning Herald reported that the NSW EPA had fined Santos because extracted waste water from its coal seam gas drilling in the Pilliga Forest, near Narrabri, had contaminated an aquifer.
The level of the fine wasn’t much of an issue, just $1500. Also, according to the EPA, the contaminated aquifer was not used for livestock, irrigation or human consumption. Also, it was not contaminated by any drilling fracking process, which has commonly been demonised. Rather, a retaining dam holding waste water extracted from coal seams had not been lined properly and leaked (such retaining ponds are now banned). Santos themselves discovered the problem with the dam (constructed by the prior owner of the operation before Santos acquired them), and it was Santos that reported the leak to the EPA. Also, Santos have since decommissioned the dam after identifying its inadequacies [Postscript: Santos has since confirmed that the pond which leaked, has not been drained and still holds legacy waste-water. By 'decommissioned' they meant it was no longer being used for holding further waste-water produced from drilling activity].
But what leaked into the aquifer generates the kind of fear and concern among the community that cannot be calmed by rational discussion or a range of engineering safeguards and expert reassurances. The leak included uranium, at levels about 20 times above the level of Australian drinking water guidelines for human health. Of course, it wasn’t the only nasty element in the water with lead, arsenic, and barium also present. These are all incredibly toxic, but uranium holds a special place in the human psyche due to its association with the atom bomb.
This is highly problematic for Santos because it desperately needs to overcome emotion-charged community concerns about CSG extraction, so it can add more sources of gas supply. You see, Santos is in a major pickle. In conjunction with its partners in the GLNG consortia, it has signed onto contracts and invested billions of dollars to supply huge quantities of gas overseas, before it had confirmed it could access that amount of gas. It had thought that it would find that gas as it progressively expanded its coal seam gas drilling activity, but it’s turned out to be more difficult than anticipated.
A few weeks ago Santos was savaged by a range of stock market analysts for its failure to find additional supplies of gas (these are graded at different levels of confidence such as ‘2P’ and ‘2C’ as to whether they can be successfully extracted, see here for an explanation).
JP Morgan’s Benjamin Wilson and Daniel Butcher noted on 21 February:
“Unfortunately another result call today that was squarely focused on the poor quality of the Santos year end reserves statement. Yet again, GLNG failed to register meaningful 2P reserve growth and 2C contingent resources were down. Over the last three years, 2P reserves growth has been 5%, 2% and 1%; 2C contingent resources have declined by -12%, -50% and -16% respectively. Together we view 2P 2C as an indication of ultimate resource recovery… We do not think management were able to provide a complete answer as to why GLNG reserves have stagnated despite reporting improved flow rates from Fairview and drilling another 200 wells this year. Cooper Basin 2P reserve growth is also tracking well behind Santos’ 1000PJ target.
They later go on to note:
“At FID [Final Investment Decision] Santos stated it would prove up the reserves much faster than it has…GLNG originally planned to add ~2,000PJ to 2P reserves across 2011-13. In fact it has added just ~400PJ leaving a shortfall of ~1,600PJ versus the target at FID.”
A few days later on February 24, Morgan Stanley’s Stuart Baker and Adam Martin observed:
“Oil and gas reserves fell by 3% despite high levels of activity and investment in key basins, particularly the Cooper Basin and GLNG. The latter is short gas for the second train, and the timing, sourcing and cost of future procurement are key uncertainties in our valuation. Reserves have trended down since 2009, and 69% of 2P reserves are undeveloped, increasing our concern about ongoing high capex to convert reserves to production”.
James Bullen from Bank of America Merill Lynch noted on the same day:
“GLNG has spent $900 million on exploration and appraisal since FID in 2011, during this period they have added a meagre 397PJ of 2P reserves. This equates to a finding cost of $2.26/GJ. That is very substantial and raises real concerns over the cost of building their future reserves.”
“The GLNG JV has spent ~$1.4bn on non-LNG project capex since FID with the SIB spend at ~$200million per annum. This equates to $5/GJ and exceeds the $190million in revenue generated by the GLNG domgas business in 2013; something does not add up [Bullen’s bolding].”
The reaction to the news of the aquifer contamination (which actually occurred several years ago) does not bode well for Santos addressing this criticism, nor other CSG operators with supply shortfalls, such as AGL Energy.
NSW Labor put out a press release stating that: “The O’Farrell Government’s Memorandum of Understanding (MoU) with Santos to fast track the approval process for Coal Seam Gas mining in the Pilliga forest should be torn up in light of revelations of contamination of the water aquifer.”
The Greens exclaimed that this event meant it was "game over for coal seam gas”. And a range of other environmental groups have leapt onto this news to justify their opposition to coal seam gas extraction.
Irrespective of whether this particular leak is a one-off that’s unlikely to be repeated, it makes Santos’ task of gaining community trust to expand drilling a whole lot more difficult.