Santos Limited, the Australian energy giant, recently announced another set of "solid financial results" accompanied by the usual fanfare of record dividends and strong cash flow. However, beneath this veneer of success, a potential time bomb is ticking away: their aggressive approach to carbon capture and storage (CCS).

The company is heavily promoting its CCS portfolio as a key driver of future growth, with projects planned in Australia, Timor-Leste, and Alaska. CEO Kevin Gallagher paints a compelling picture of a closed-loop system, where Santos sells LNG to customers in Japan and Korea and then accepts their CO2 emissions for storage in depleted reservoirs. This narrative aligns with global decarbonization efforts and positions Santos as a leader in the energy transition.

However, the company's reliance on this nascent technology, particularly to offset emissions from the crucial Barossa gas project, raises a critical question: what if CCS doesn't deliver on its promise?

The Bayu-Undan CCS project, intended as the primary offset for Barossa, faces a daunting approval process. While recent legislation enabling cross-border carbon transfer is a positive development, regulatory hurdles in both Timor-Leste and Australia remain significant. The projected final investment decision (FID) for Bayu-Undan in 2025 pushes its online date past Barossa's planned first gas in the same year, creating a gap that Santos will have to bridge with purchased carbon credits—an added cost burden.

Even if Bayu-Undan CCS does come online, technical challenges and uncertainties around large-scale CO2 capture and storage are significant. The technology is unproven at the scale required for Barossa, and the long-term integrity of geological storage sites is still under investigation.

"Gallagher remains optimistic, expressing unwavering confidence in the technology and project timeline. However, his optimism might be ignoring the potential for delays, cost overruns, or even outright failure, especially considering the two-year delay of the Barossa project due to environmental approval hurdles. The Moomba CCS project, a much smaller project than Bayu-Undan, provides a glimpse into these potential challenges. Despite its smaller scale, Moomba has already seen a 30% cost blowout, primarily due to contractor capacity constraints and engineering scope creep."

Santos's aggressive CCS strategy feels like a high-stakes gamble, betting the company's future on a still-developing technology. If CCS fails to deliver, Santos could face significant financial and reputational damage.

The price of carbon credits is notoriously volatile, and a sudden spike could severely erode Santos's already thin margins. Moreover, relying on offsets instead of reducing emissions could expose Santos to criticism from investors and environmental groups, jeopardizing their social license to operate.

Potential Cost of Carbon Credit Offsets for Barossa

The following chart illustrates the potential annual cost to Santos for purchasing carbon credits to offset Barossa's reservoir emissions, assuming a one-year delay in Bayu-Undan CCS.

If Bayu-Undan CCS faces technical or regulatory setbacks, resulting in a multi-year delay, the cost of purchased offsets could balloon into the billions, severely impacting Santos's financial performance and potentially threatening their ability to develop future projects.

While Santos's current financial performance appears robust, their reliance on a yet-to-be-proven technology casts a shadow on their future prospects. The "ghost in the machine"—the looming threat of CCS failure—may come back to haunt Santos and its investors in the years to come.

"Fun Fact: The term "ghost in the machine" was coined by philosopher Gilbert Ryle to criticize the idea of a mind separate from the physical body. In this article, it's used metaphorically to describe the potential disconnect between Santos's current financial success and the uncertain future of their CCS-dependent strategy."