The deal was completed seven months later with ConocoPhillips making a concession to Santos around the part of the payment contingent on Barossa going ahead.
In truth, the US major won the negotiation. Between the announcement and completion of the deal, the price of oil fell 40 per cent.
Normally in the oil and gas industry, this would trigger a clause that all bets were off, allowing Santos to walk away or negotiate a lower price. However, according to a source familiar with the negotiation but not authorised to speak publicly, Santos bargained away this option in its eagerness to do the deal.
This left Santos exposed. It had paid too much for assets that came with a price tag of about $1.6 billion to decommission Bayu Undan. Also, the assets would be worthless if Barossa did not proceed, despite being expensive and dirty.
In March 2021, Santos announced it had found a solution to both problems. The cost to build Barossa had been slashed from $7 billion inherited from ConocoPhillips to $5.4 billion. However, it was a sleight of hand.
Instead of buying the floating production facility – the most expensive component of the project – Santos would lease it. Claiming this as a cost reduction was as logical as buying a fridge using a buy now, pay later (BNPL) service and saying it was free.
Santos chief executive Kevin Gallagher also said at the time that as well as cutting costs, engineering changes had “significantly reduced the project’s carbon footprint”.
There was also some sniping from the sidelines as iron ore billionaire and clean energy proponent Andrew Forrest soon after berated Santos for pursuing what he labelled “atrocious” Barossa, “one of the most polluting projects in the world”. Gallagher, however, stuck to his guns, claiming his engineers had reduced Barossa’s emissions by 25 per cent. Despite repeated media requests, Santos never detailed or substantiated the claim.
A week after announcing Barossa was cheaper and cleaner, Santos made its final investment decision (FID) on 2021. With its partners, Japanese power generator JERA and SK Group, one of South Korea’s largest family-run conglomerates, in tow, the energy major would spend $5.4 billion on drilling for gas, the floating facility and a 260-kilometre pipeline, plus $900 million to refurbish the Darwin LNG plant.
ConocoPhillips, however, was disappointed as “the purchaser failed to pay the FID bonus when due”. It is now pursuing $300 million plus interest through arbitration, according to its 2022 annual report.
Mitigating Barossa’s emissions remained a clear challenge for Santos, and to deal with this it needed to entice JERA and SK Group to buy some of its equity in Barossa and the LNG plant. The preferred solution to containing the emissions – to store the carbon dioxide from the Barossa field in the about-to-be-closed Bayu Undan field – had the added benefit of delaying the costly decommissioning of Bayu Undan.
Instead of being released into the atmosphere at Barossa, the reservoir of CO2 would be piped 380 kilometres to Darwin, separated from the gas in Darwin, and then piped 500 kilometres offshore to Bayu Undan.
According to a 2021 Santos study obtained by this masthead, the $2.4 billion carbon capture and storage project was not viable if it just served Barossa – it needed revenue from storing CO2 from Japanese oil major Inpex’s Ichthys LNG project as well. However, Inpex is developing an alternative storage site in Australian waters that does not need complex agreements between two national governments.
Starting Barossa while still assessing Bayu Undan CCS gave Santos a dilemma about expensive offshore pipelines. The construction under way included reusing part of the Bayu Undan pipeline for the last 120 kilometres to shore, but this meant there would be no way to get CO2 to Bayu Undan for storage.
To keep its dream of Bayu Undan CCS alive in mid-2022 Santos decided to spend an additional $930 million for the Barossa pipeline to go all the way to shore, leaving the Bayu Undan pipeline untouched. The total cost of Barossa – the initial project, fixing the LNG plant, the extra pipeline and Bayu Undan CCS if it goes ahead – was now $9.6 billion.
Then trouble struck from an unexpected direction.
In December 2022, Tiwi Islands traditional owners had their landmark legal victory upheld, after Santos failed in its appeal against a Federal Court judgment that forced it to halt Barossa drilling.
The court said it was clear the original appellant, Dennis Tipakalippa, and the Munupi clan, had cultural and spiritual interests that required them to be consulted.
“Our sea is like our mother – we are part of the sea and the sea is part of us. Santos and every other gas company must take note that this is our country, and we must be consulted,” said Tipakalippa, a senior lawman for the traditional owners of the northern Tiwi Islands.
New consultation is under way, with four meetings planned on the Tiwi Islands in late April. Once completed, Santos must resubmit its drilling plans to the offshore energy regulator NOPSEMA for approval.
The installation of the Barossa pipeline was stopped by NOPSEMA in January, weeks before it was to start. An archaeologist had found a significant chance there were sites along the route that were significant to local Indigenous people.
Santos has to engage independent experts to assess if any sites along the route have spiritual or cultural importance to Indigenous people and then, if necessary, adjust its plans.
Santos did not respond to questions about when it expects to recommence drilling and pipe lay, or if the project can meet its schedule to export gas by June 2025.
While Santos is mired in regulatory complexity and navigating Indigenous cultural rights, it has expensive offshore construction vessels idle. There is a risk the specialised vessels will not be available if Santos gets the all-clear to proceed, as they may be needed elsewhere.
Detailed design of Bayu Undan CCS is nearing completion, which may shed light on its viability.
At Santos’ annual general meeting in Adelaide this month, Gallagher took aim at the federal government’s revised safeguard mechanism to reduce carbon pollution being applied to Barossa.
Three and a half years ago when Santos bought what ConocoPhillips did not want, climate change was a thing – but it seems the company forgot that in a rush for growth.
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