Costs for Santos's $4.7 billion Barossa gas project will increase significantly and revenue will decrease under changes to the federal government's safeguard mechanism, according to a global climate analyst.
The gas development in the Timor Sea, about 300 kilometres north of Darwin, is expected to be one of the projects most impacted by the reforms to Labor's climate change policy announced this week.
One of the biggest hurdles facing Santos in its Barossa development — aside from some significant concerns about consultation with Indigenous traditional owners — is the issue presented by the make-up of Barossa's gas.
The gas in the Barossa field is some of the most carbon-intensive in the world — containing around 18 per cent carbon dioxide — meaning the project could end up producing more CO2 than LNG.
It has been labelled a "carbon-dioxide emissions factory, with an LNG by-product" by a gas industry veteran and "an atrocious project" by mining magnate Andrew Forrest.
Analyst predicts Santos 'struggling' with reforms
Under the changes to the safeguard mechanism, all new gas fields for LNG export will need to have net-zero carbon emissions from their first day of production.
Climate Analytics, a global think tank working on climate policy, has estimated Santos's revenue from Barossa could be negatively impacted by between 2.8 to 5.6 per cent due to the need to buy carbon credits to offset the project's emissions.
"A 5.5 per cent hit to revenue is a big one, and if the carbon price gets up towards $75 per tonne, it's closer to 10 or 11 per cent," Climate Analytics director Bill Hare said.
"It's going to be very hard for Santos to convince the investors that it is relying upon for financing that this is going to work."
Santos declined to respond to questions about the safeguard mechanism's impacts on Barossa and has not made any announcements to the ASX regarding the reforms.
The company has previously said Barossa would be "one of the lowest-cost LNG supply projects in the world".
Mr Hare said Santos was likely "struggling" with what the reforms meant for Barossa's development.
"[The impact] depends on the domestic carbon price in Australia, it depends on what bets you want to make about the LNG price internationally — it has been very high in 2022 but it is dropping and forecast to drop further," he said.
"All of these factors do not add a lot of confidence that this project will be financially viable, quite apart from its climatically destructive effects.
"It's a bit too early to call, but the safeguard mechanism reforms definitely tip the balance towards this project not happening."
In 2021, Santos said the Barossa project would create 600 jobs during construction, with 350 long-term jobs in Darwin after 2025, contributing around $2.5 billion in local wages and contracts over its 20-year life cycle.
Santos's carbon capture and storage plans
To deal with emissions from gas production at Barossa, Santos has flagged it wants to store carbon dioxide under the sea floor in its soon-to-be depleted gas field west of Darwin, called Bayu-Undan.
The carbon capture and storage (CCS) plan involves piping Barossa's gas 300 kilometres to its Darwin LNG plant, where the CO2 will be removed, compressed and piped a further 500 kilometres out to Bayu-Undan.
Santos has said a Bayu-Undan CCS development could store up to 10 million tonnes of carbon dioxide equivalent per year.
But John Robert, a chemical engineer and industrial economist with more than 40 years' experience in the oil and gas industry, has cast doubts on the project's ability to actually reduce Barossa's emissions.
Mr Robert estimated that due to Barossa's high carbon dioxide content and the energy-intensive compression needed to pipe the gas, the whole project would likely still produce more CO2 than LNG, even with the CCS component.
"Adding CCS to the Barossa development in the way Santos appears to favour would bring little or no reduction in emissions while adding substantial cost, delays, and risk," Mr Robert said in a February 2022 report for the Institute for Energy Economics and Financial Analysis.
"Some gas discoveries are just not worth developing especially in light of the International Energy Agency's … road map, which clearly states there must be no new oil and gas projects globally … if the world is to have any chance of reducing emissions.
"Barossa, with twice the reservoir gas CO2 content of the equally highest currently developed Australian gas fields — Ichthys, Gorgon, and Prelude — is one of those."
Santos has been targeting the first half of 2025 to start gas production at Barossa, with the Bayu-Undan CCS to follow in 2027.
Following the safeguard mechanism reforms, with the need to make Barossa's gas net-zero from day one, Santos may need to reassess the timelines for both projects.
Traditional owners welcome safeguard mechanism
A group of traditional owners on the Tiwi Islands has been campaigning against the development of the Barossa, citing its potential impact on dreaming storylines and sea country.
Representative for the Munupi clan Antonia Burke said she was "ecstatically happy" with the changes to the safeguard mechanism.
"Finally there's movement forward and that this could potentially be stopped," Ms Burke said.
"[Santos] cannot prove [Barossa] to be carbon-neutral at the time they want to start producing gas, they cannot possibly meet the targets that have been set by the federal government.
"We expect the Barossa project to be completely shut down."
If the Barossa project does go ahead, none of the gas will likely go to the Australian market. Santos has signed a long-term sales agreement with a Japanese corporation to take 1.5 million tonnes of Barossa's gas for 10 years, with extension options.
