Australia | Jun 15 2007
By Greg Peel
While it is now accepted that Australia will have a cap-and-trade emission scheme in place sometime around 2012, or maybe 2010, depending on who is in power, Australia’s major polluters are not going to sit around doing nothing while the government figures out just how it can shield the country’s major export industries from the economic effects of emissions reduction. The value of a tonne of carbon is as yet undiscovered, as it requires a legislated reduction target in order to establish a price. However, no company is going to simply wait for the bad news.
Oil and gas producer Santos (STO) is on the move in an initiative that should turn carbon from a legacy to a valuable commodity.
Joseph Heller once lampooned farm subsidies in the US by suggesting that alfalfa growers would be paid not to grow alfalfa. The more alfalfa they didn’t grow, the more they were paid. While 1961’s Catch-22 was dripping with dark satire, little did Heller know that one day a carbon trading scheme would actually work on a similar principal.
The aim of an emissions reduction target is to reduce the amount of carbon and other greenhouse gases being released into the atmosphere. Companies now releasing large amounts of carbon will be able to earn carbon credits under a trading scheme by maintaining the same level of production but releasing less pollution. In other words, the more carbon you don’t release, the more you get paid.
It stands to reason therefore that those companies with the greatest opportunity to benefit from carbon credits include those who have the most carbon emissions to reduce or capture in the first place. This point has not been lost on Santos.
Merrill Lynch reports Santos has announced a proposal to build a carbon storage “hub” at Moomba for carbon dioxide it captures from its Cooper Basin operations. The initial demonstration phase will involve a small (1mtpa) storage exercise to be operational by 2010, with a large scale (20mtpa) storage exercise planned if successful. Where is the carbon dioxide going to go? Well back into the depleted wells at Moomba.
This is a rather elegant solution. Santos plans to spend $700m on its demonstration phase, and expects to receive a $275m grant from the government. Then it will ultimately earn carbon credits for every tonne of carbon it captures, as soon as a trading scheme is up and running and a price is set. But what’s more, by pumping gas back into a field reaching the end of its production life, Santos can exploit the pressurisation to thus recover oil that might otherwise have been left in the too hard basket.
Assuming a carbon price of $20/t, Merrills estimates the project could generate revenues of $400m per annum. It is also assumed that Santos’ JV partners in the Cooper, Origin Energy (ORG)(13%) and Beach Petroleum (BPT)(21%), will be in on the deal.
The analysts note that Santos has perennially traded at a discount to the oil sector because of its exposure to the aging Cooper Basin. Although geosequestration is still in the early stages of development, the analysts suggest that Santos has the potential to unlock substantial value. Merrills has a Buy rating on Santos with a $14.30 target, but has not included any value for the carbon project as yet.