The fog of war: How Santos seized its moment to develop Alaskan oil

In the first instance, the surge in oil and gas prices that the war has fostered has tripled Santos’ first-half profit, providing the company with a massive cash-flow bonus with which to fund new oil and gas projects.

Secondly, it has moved the goal posts around what is considered acceptable and shifted the balance between decarbonisation and the need for oil and gas supply.

Santos’ 51 per cent stake in the Pikka project is a legacy of its acquisition of Oil Search last year. Until this week, investors had been led to believe Pikka would be fully or partly divested by Santos.

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When Santos acquired Oil Search for $8.8 billion last year, it was a play to get its hands on the crown jewels – Papua New Guinea LNG.

Pikka was, at the time, characterised as an asset which was more of an inconvenience and certainly not core to Santos’ long-term strategy.

Now Gallagher boasts the project’s strong fundamentals, being “located in a world-class oil-producing province with significant existing infrastructure, has low unabated emissions intensity and is supported by key stakeholders, including the State of Alaska”.

It says the 80,000 barrels a day Pikka will produce will require a capital expenditure from Santos of $US1.3 billion ($1.9 billion) but produce an internal rate of return of around 19 per cent, assuming an oil price of $US60 a barrel – which is well below the current price of about $US92.

Meanwhile, as part of a broader announcement on Wednesday, Santos said it was selling a 5 per cent stake in PNG LNG.

It is difficult to know whether this apparent alteration of Santos’ strategy is responsible for its share price tumbling on Wednesday. It is hard to imagine investors would have reacted negatively to the company’s bumper profit, the 38 per cent increase in its dividend or the extension of its buyback – all of which are positive for shareholders.

Gallagher is confident that Pikka’s “compelling value for shareholders” has robust support from “local stakeholders”.

The development will raise the ire of the environmentally conscious and risks tarnishing the company’s ESG (environmental, social and governance) credentials – despite Santos’ characterisation of Pikka as a low-carbon oil project.

It could also present problems for the broader community who have a more idealised view of Alaska as a pristine environment – already threatened and whose polar bear inhabitants are increasingly consigned to being stranded on floating ice drifts.

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