Prices Trump Protests as AGL's Gas Exit Puts Santos in Spotlight

  • AGL expects A$640 million in writedowns after halting project
  • Explorer abandons coal-seam gas project in New South Wales

Explorers seeking to tap natural gas reserves in Australia’s most populous state have faced fierce opposition from environmental groups. Sliding energy prices are proving to be an even tougher obstacle to overcome.

AGL Energy Ltd., Australia’s biggest power producer, on Thursday abandoned its Gloucester coal-seam gas project in New South Wales, saying it can’t justify the A$1 billion ($717 million) investment. Another project led by Santos Ltd., whose new Chief Executive Officer Kevin Gallagher took the reins this week, could be deferred, according to Citigroup Inc.

The almost 70 percent drop in crude over the past two years has discouraged investment across the industry, with Sydney-based AGL citing the weakening market as a key factor behind A$640 million in expected writedowns. It adds to pressure from protesters, who say the coal-seam gas development and hydraulic fracturing, or fracking, could harm the environment.

“Price at the moment is a major impediment, taking away the economic incentive,” said Adrian Prendergast, a Melbourne-based analyst at Morgans Financial Ltd. “New South Wales is quite a challenging environment as well. Until there’s greater certainty around the ability to develop these assets, it’s hard to see these things pushing ahead.”

Environmental Concerns

The Wilderness Society quickly urged Santos to follow AGL and bail out of its coal-seam gas operations in the state’s Pilliga forest.

“The people of New South Wales have spoken and they do not want coal seam gas in their state,” the environmental group wrote in an e-mail statement.

AGL will book a A$119 million post-tax charge on Gloucester, which also was hurt by disappointing gas flow data, and relinquish its license to the state, the company said. AGL also said it plans to stop production at its Camden venture in 2023, 12 years earlier than planned.

“Santos remains committed to exploring for, producing and supplying gas to east-coast gas customers,” the Adelaide-based company said in an e-mail response to questions. “The development of local gas resources will be critical to achieving a supply-demand balance in the future.”

Softer Demand

Longer term, companies including Santos will have an incentive to develop the coal-seam gas assets in New South Wales “given the gas that’s there and the future shortages we’re going to have,” Prendergast said.

Santos about a year ago announced a writedown of A$808 million for its exploration assets in New South Wales.

“Given the low oil price and Santos being capitally constrained, we expect it will continue to delay development,” Dale Koenders, a Sydney-based analyst at Citigroup, said by phone. “Do they walk away completely or just park the asset? That will be a question for the new CEO.”

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