Exploration is dying, asset sales are thriving: Gallagher 

YESTERDAY Santos flagged US$2-$3 billion in asset sales to reduce its gearing further, from 27.5% at the end of December 2021, as part of its annual report to shareholders. 
Exploration is dying, asset sales are thriving: Gallagher  Exploration is dying, asset sales are thriving: Gallagher  Exploration is dying, asset sales are thriving: Gallagher  Exploration is dying, asset sales are thriving: Gallagher  Exploration is dying, asset sales are thriving: Gallagher 

Helen Clark


However, despite the belief it's a sellers' market, managing director Kevin Gallagher does not see a knock on effect from high prices translating through to new appetite for exploration. 
He sees ESG concerns and regulatory changes hampering any moves to find new supply. 
Gallagher would not be drawn on what it will sell, nor when. The obvious upstream picks are the Pikka oil development in Alaska where it holds some 50%, the offshore Western Australia oil development Dorado (80%) and its 42.5% share of flagship PNG LNG. Both oil projects are awaiting sanction. 
It increased its stake in the latter last year as part of its buy of Oil Search; the $21.5 billion deal completed in the last weeks of December. The PNG sale makes sense given it now has a larger share than operator ExxonMobil, but it is also a strong cash generator. 
Midstream assets or Western Australian domestic gas assets could also be on the cards. 
Despite ESG concerns the MD believes surging oil and gas prices thanks to lower supply. 
"I think there is a more pragmatic view about the future of some of these resources than perhaps there was six to 12 months ago," he said.
"Some of the big investor funds globally are saying, ‘Woah, wait a minute ... with the supply crunch around the world right now and the price spike we are seeing as a consequence of that, we just have to be careful we don't turn the tap off too quickly'.
"I just don't see big chunks of supply coming to the market to arrest that in the short term so I think we'll see stronger prices for a bit longer, but I would never bet on it and I would never count on it."
However there has been no knock on effect to exploration. In Australia, offshore exploration was lagging back in 2020 when for the first time in industry history onshore spend overtook offshore. A look at the titles administrator finds only 10  permits from Geoscience Australia's 2019 and 2020 awarded in 12 months. Another 11 were knocked back, it should be noted. 
Santos has in fact picked up three of those; two are close to its existing WA domgas operations. 
Speaking to Energy News during a media call Gallagher said, "I think first of all one of the challenges with exploration is it is very expensive... and it's high risk. And this comes into gas prices; we take a lot of risk and spend a lot of capital before we find anything. 
"I think we're seeing a cautiousness... you can spend hundreds of millions of dollars but you're not sure if you've got a line of sight to development."
"Whether that be NOPSEMA rules, whether that be federally, whether that be state rules... what the government asks you to do it to make a financial commitment to explore. a few years later they're not letting you develop it.
He did not give an example of this, although its onshore Narrabri CSG project in New South Wales was the glaring example. 
"You end up spending all that money and having to write it off, and it's not just a subsurface risk any more, it's a political risk that's on top of that subsurface risk," he said. 
"It's much harder and taking much longer and making decisions on capital for new resources. 
"Demand is going nowhere as there is no alternative and supply is not coming in to replace anything. 
"It's a real dilemma we have globally." 
However this won't affect his current sell downs. 
"The sell downs are core assets with approved projects, the resources are development or close to development with approvals in place.... What I'm talking about is investing in exploration." 
In fact, the Dorado Offshore Project Proposal, one of several approvals needed, is still with the National Offshore Petroleum Safety and Environmental Authority. 
It was lodged in September and is still being assessed. One unnamed analyst speaking to Energy News this morning flagged both regulatory approvals and also threats from NGOs as hurdles to the large oil development, whose first phase will be some 70,000 barrels of oil per day developed. 
Of course, the Scotsman was canny enough not to name what he will sell.