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The government has been accused of giving in to pressure from Santos – as revealed by a series of emails from its chief executive. By Mike Seccombe.

Emails reveal Labor caved in to Santos

An aerial shot of Santos’s Moomba gas field in outback South Australia.
An aerial shot of Santos’s Moomba gas field in outback South Australia.
Credit: AAP Image / Santos, Simon Cross

The letters from the boss of the fossil fuel company to Climate Change and Energy Minister Chris Bowen were blunt. The company and its foreign partners “could not accept” the government’s plan to reduce greenhouse gas emissions unless it guaranteed loopholes to allow it to keep polluting.

If it didn’t accede to the demands, wrote Santos chief executive Kevin Gallagher, the company and its Japanese and Korean joint venture partners could pull the plug on a $5 billion gas project. And if that project didn’t go ahead “the Darwin LNG project would also have to be mothballed and the life extension project worth another A$1 billion would not proceed”.

Hundreds of direct jobs would be lost, along with many more indirect jobs, the government would forgo billions in revenue and “Australia’s relationships and reputation in Japan and Korea would be seriously damaged”, threatened Gallagher.

In due course, the government did pretty much as it was told.

The two missives from Gallagher were sent on March 21 and 23 this year, but only became public on Thursday last week, the very last day of the parliamentary year, pursuant to an order by the Senate. By that time, the parliament had passed the legislation Gallagher wanted, allowing his company and others to sequester vast amounts of carbon dioxide in holes under the sea. That is, if they can get the technology to work.

The release of the letters slid by largely unnoticed amid the flurry of last-minute business relating to industrial relations laws, reform of the National Disability Insurance Scheme and the panicked response to the High Court decision on indefinite detention. But it didn’t slide past David Pocock, independent senator for the ACT, and one of the prime movers behind demands that the documents be produced.

The correspondence, he says, confirms what he, the Greens and other crossbenchers suspected all along but could not get the government to admit: that it had tailored key pieces of legislation to suit the gas lobby in general and Santos in particular.

“It just points to state capture in Australia. I don’t think there’s another way of putting it. The fossil fuel industry has the major parties just repeating their talking points, despite them not being aligned with what’s good for Australians,” he says.

It’s not just in Australia, of course, where oil and gas interests exert undue influence. We saw that at the just-completed UN COP28 climate conference in Dubai, where most of the countries attending wanted a resolution calling for the phase-out or phase-down of all fossil fuels. But because Conference of the Parties agreements require unanimity, this was blocked by a group largely comprised of petrostates and led by Saudi Arabia.

Instead, COP produced an anodyne call for a “transition away” from fossil fuels.

Even so, as Chris Bowen said, this was “no small thing”.

“This is the first time that fossil fuels have ever been mentioned in a COP decision,” Bowen said, and claimed it sent a clear message that “our future is in clean energy, and the age of fossil fuels will end”.

But talk is cheap, says Pocock. Action is what counts.

While the Albanese government is much better than the preceding Coalition one, its continuing support of new projects, particularly for export, undermines its climate credentials.

The government “talks a big game”, Pocock says. “What we’re hearing from the government about the need to transition, the urgency of it, doesn’t match what they’re doing when it comes to the expansion of fossil fuels.

“The step up in terms of renewables and the grid is great. But the other part that they don’t want to confront is what climate scientists, International Energy Agency, a whole bunch of other people are saying: that we can’t burn these new reserves that we’re busy looking to develop and also actively exploring for.”

Which brings us back to Santos, the Barossa project and Gallagher’s letters in March.

The crux of Gallagher’s concern – and that of Santos’s joint venture partners and the fossil fuel sector more generally – was the government’s pending legislation for a so-called safeguard mechanism, a scheme that would set “baselines” limiting the amount of climate-heating gases that could be emitted by Australia’s biggest industries, including gas producers. These baselines would decline gradually, on a trajectory consistent with achieving Australia’s emission reduction targets of 43 per cent below 2005 levels by 2030 and net zero by 2050.

Gallagher’s particular complaint was that any new projects could be required to be net zero from the outset. The emissions had to be either fully offset through the purchase of carbon credits, or captured and permanently stored. And Barossa, a new offshore gas field about 285 kilometres north-west of Darwin in the Arafura Sea, would be caught by that provision.

Furthermore, Barossa gas is particularly impure. Along with methane – euphemistically called natural gas, the component Santos wants to sell – is a lot of carbon dioxide, the biggest contributor to global heating. At 16 to 20 per cent CO2 by volume, noted an analysis by The Australia Institute in May, the Barossa gas reservoir has a higher proportion of CO2 than any other gas field in Australia – six times greater than gas from the North West Shelf in Western Australia, and three times greater than the Bayu–Undan gas field near East Timor, which currently feeds the Darwin liquefied natural gas (LNG) facility.

“When the project’s offshore and gas processing emissions are factored in, the LNG produced from the Barossa field would have a total emissions intensity of 1.4 tonnes of CO2 per tonne of LNG produced. This makes the Barossa development the most emissions intensive LNG project in Australia and the world,” the institute’s analysis concluded.

In his correspondence, Gallagher claimed the Barossa project was only “middle of the pack” globally in terms of carbon intensity. Nonetheless, the planned safeguard mechanism posed a huge threat to it.

Under the pending legislation, the project would not be allowed to simply vent the massive quantities of CO2 into the atmosphere, either at source or at the gas processing facility prior to liquefaction or refining.

What to do? Santos’s idea was to deal with it through the contentious means of carbon capture and storage (CCS). It would separate out the CO2 and pipe it to the Bayu–Undan field, which was almost exhausted, and store it there, in the old wells under the seabed.

The problem was it planned to start producing gas from Barossa in 2025 but could not possibly get the CCS happening until 2030.

So, in the series of aggressive communications, Gallagher argued for special treatment.

He said that because the final investment decision had already been taken, any application of the new rules to Barossa would be unfairly retrospective.

The project already had the relevant approvals to extract, pipe and sell the gas, and the joint venture already had spent about $1.6 billion, and entered long-term contracts.

“Regarding Barossa, I reiterate the importance of CCS and the need for time to develop a CCS solution which would get Barossa to net zero … emissions by 2030, however, the Barossa JV [joint venture] cannot accept a retrospective requirement to do this from day one,” Gallagher wrote.

He argued that because Barossa was “backfilling” for the depleted Bayu–Undan field, it should not count as new gas at all, that it was “not increasing, but simply replacing, existing LNG supply volumes”.

He also claimed the measure was at odds with “the government’s recent rhetoric acknowledging the role of gas in the energy transition and the importance of honouring international LNG trade and investment relationships” and “appears designed to strangle the economics of gas development and LNG export projects in Australia”.

And he suggested the government was doing the bidding of hostile elements.

“The measure virtually mirrors the campaign by a large group of NGOs and the Greens and crossbenchers to ‘Stop Barossa Gas’,” he wrote, and went on to name some: teal independent Sophie Scamps, the Australian Conservation Foundation and the Climate Council.

“While Santos might not consider the measure terminal for the project (based on what we currently know), our Japanese and Korean partners may have a different view,” he warned.

Despite the threats, the government hung tough. The safeguard mechanism was passed within a week of the letters, on March 30.

And so Santos was left with its dilemma: how to comply with the new laws during the five years between the scheduled start of production and the time when it could have its CCS plan operational.

There was, however, an alternative way of meeting the net zero obligation provided for under the mechanism. Santos could buy offsets.

These could take a couple of forms. They could come primarily from projects that sequestered carbon through things such as planting trees to soak up carbon – so-called Australian carbon credit units (ACCU). Or they could come in the form of excess credits from other industries that succeeded in reducing their emissions faster than required under the law, called safeguard mechanism credits.

Either way, it would be very expensive.

The Australia Institute’s May analysis of the Barossa project calculated: “At the current ACCU price of $38 per tonne, offsetting 1.8 million tonnes of reservoir emissions per year would cost $69 million per year. However, it is likely that the carbon price will rise significantly once the Safeguard Mechanism reforms take effect.”

The institute also saw the strengthened safeguard mechanism imposing “considerable additional costs” on the Barossa project out to 2030 – somewhere between $500.3 million and $987.5 million. That latter figure would amount to nearly 20 per cent of the $5.2 billion capital costs of the project.

It could have been even more costly than that but for the fact the government put a $75 cap on the price of ACCUs.

Given the large number of proposed gas developments in prospect, says Gavan McFadzean, climate change and clean energy program manager with the Australian Conservation Foundation, competition for ACCUs will likely be intense. He questions whether there will be enough to go around.

“In the context of a number of enormously polluting gas basins proposed to northern Australia – Scarborough, Browse, Beetaloo, Barossa – we just don’t see how all those projects … can proceed without undermining the carbon budget and blowing up the safeguard mechanism.

“And Barossa is the dirtiest of the lot, the dirtiest ever in Australia, if it ever happens. It’s a really exceptionally polluting project,” says McFadzean.

“There’s no number of ACCUs in the Australian system that could be purchased to offset the emissions from this project. The emissions are so high.”

There are also continuing questions about the integrity of some of the offsets but, says Jennifer Rayner, head of advocacy for the Climate Council, “fundamentally, the problem here is quantity. People are using far too many of them in place of taking genuine action to cut their emissions.

“The Barossa project looks increasingly shaky and marginal, from an economic perspective, because the cost of meeting that [net zero] requirement with offsets is going to be very, very large.”

Clearly Santos also worries about the supply of offsets, because Gallagher demanded in one of his March letters “a guarantee that CCS or ACCUS/SMCs will be available to achieve net zero reservoir emissions. A forecast of sufficient liquidity in ACCU/SMC markets would not suffice.”

Apparently, he did not get his guarantee of sufficient offsets, or of legislation to allow Santos to export its carbon emissions for sequestration by CCS, because in yet another in the series of letters, he warned “if Barossa does not have sufficient access to abatement or offsets, the project’s only option to remain compliant would be to cease production, as far as we are aware.

“This is a risk not acceptable for the joint venture partners and a risk on which we need urgent and definitive clarification from you.”

Finally the government threw Santos a bone, in the form of the Environment Protection (Sea Dumping) Amendment (Using New Technologies to Fight Climate Change) bill 2023.

It amended existing legislation to allow the export and import of CO2 between countries for sequestration under the seabed. It also provided for the placement of matter into the oceans for “marine geoengineering”, such as adding nutrients to the ocean to try to increase CO2 absorption.

The interesting thing about the bill, says McFadzean, is that it appeared to be driven more by Foreign Affairs Minister Penny Wong’s department than by that of Bowen or Environment Minister Tanya Plibersek, who will be empowered to issue the relevant permits for dumping.

“And that was because of the diplomatic pressure that has been brought to bear on the Australian government as a result of the safeguard mechanism,” says McFadzean.

“What happened after the safeguard [mechanism passed] is the Japanese and the South Koreans blew an absolute gasket … There was a lot of international pressure. So you had … half of DFAT off convincing the Pacific Island nations that we’re taking climate change seriously, and the other half off reassuring the Japanese and the Koreans that they will get long-term gas from Australia. So they were talking out of both sides of their mouth.”

The bill passed on November 12, after long and heated debate. Initially the Coalition parties, for seemingly no better reason than creating mischief, opposed it. Which infuriated Wong.

She accused the Liberals and Nationals of having “said no to Santos, you’ve then said no to Woodside, you’ve said no to Inpex … you’ve said no to Korea, you’ve said no to Japan”.

Reportedly, Labor’s resources minister, Madeleine King, wrote to her Coalition counterpart, Susan McDonald, to say failure to pass the bill expeditiously could undermine investment confidence and jeopardise “the ability of the resources sector to decarbonise its supply chains”.

Then the Coalition parties came on board. But not the Greens and not Pocock.

“During the sea dumping bill we – the cross bench – spent an entire week asking the government: Where’s this legislation come from? Is this for Santos, for this project? Have they requested it? And the government wouldn’t answer,” he says.

“All we did get out of them during the debate was that this has been in the works for quite a while. And ultimately, Tanya’s department got lumped with it.

“But this correspondence couldn’t be clearer, talking about the Barossa project and Timor-Leste and the need for this legislation to pass.”

Jennifer Rayner gives the government credit for not buckling to the global fossil fuel industry on the safeguard mechanism. But the sea dumping bill, intended to facilitate Santos, and potentially others, to start trying to store carbon at the bottom of the ocean, is another matter.

“CCS doesn’t work at the moment,” she says. “So some of the biggest projects around the world which have been really hot are failing to live up to their potential, like the Gorgon project in Australia.

“But even if it worked in the future to capture Scope 1 emissions [from the mining of the gas], it does nothing with the largest source of harmful carbon pollution, which is the Scope 3 emissions when those fossil fuels are burned,” Rayner says.

Those Scope 3 emissions, she says, amount to about 80 per cent of total emissions from many big gas projects.

“So the idea that you might capture some percentage of the onsite emissions associated with gas extraction and do nothing about the Scope 3 that are burned overseas doesn’t stack up.”

We knew that already. The real story revealed by the Gallagher letters, says Rayner, “is actually the incredible sense of entitlement with which the CEO of a fossil fuel company addressed the Australian government and attempted to dictate the policy settings.”

Pocock likewise is disturbed by the arrogance of the fossil fuel lobby. “To Chris Bowen and the government’s credit, things are far, far more constructive and stronger than they have been in the past,” he says. “But there’s that little sort of asterisk … about offsets and all these sorts of loopholes that the International Energy Agency has been pretty scathing of.

“The head of the IEA has had some pretty strong things to say about how CCS is being used by fossil fuel companies to avoid transitioning.”

And the sea dumping bill facilitated more of it.

Says Pocock: “As a country we’ve got to make the choice. Do we put our futures and the wellbeing of young people and future generations of Australians ahead of the short-term profits of a handful of companies like Woodside and Santos?”

To date, it seems, the government continues to back profits. Whatever it might say at COP.

This article was first published in the print edition of The Saturday Paper on December 16, 2023 as "Emails reveal Labor caved in to Santos".

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