THE continuing industry downturn has hit leading Australian oil and gas company Santos extra hard, with the company reporting a 2016 first half net loss of US$1,104 million.

The result was significantly impacted by an impairment charge for the GLNG project  in Queensland of US$1,050 million after tax and lower oil prices.

The company said sustained low oil prices continue to constrain capital expenditure and impact GLNG.

During the course of 2016 there has been a slower ramp up of GLNG equity gas production and an increase in the price of third party gas. This has caused Santos to adjust its upstream gas supply and third party gas pricing assumptions for the project.

“The expected impairment charge for GLNG is clearly disappointing but it is a consequence of the challenging environment which we now face. We have decided to adjust our long-term operating assumptions for GLNG to reflect the reality of the current oil price environment,” Santos chairman Peter Coates said.

“However, we firmly believe in the strong long-term growth of LNG consumption and demand globally. GLNG will continue to be an important part of our LNG portfolio and a key supplier of LNG to the Asian market,” Mr Coates said.

Santos managing director and CEO, Kevin Gallagher, said low oil and gas prices continue to challenge the company’s upstream business and the entire oil and gas industry.

“At GLNG we are seeing the effects of ongoing constraints on capital expenditure and a softer LNG market. We are experiencing a slower ramp up in production of GLNG equity gas and the price of third party gas has increased,” Mr Gallagher said.

“We have therefore adjusted our assumptions regarding upstream gas supply and third party gas pricing. This will not affect GLNG’s ability to meet its LNG off-take commitments.

“We will continue to maintain a disciplined approach to capital allocation, reducing costs and seek opportunities to optimise our asset portfolio in a manner that delivers value to shareholders.”

Excluding impairments and other one-off items, the company recorded an underlying net loss of US$5 million after tax for the first half.

MrGallagher said Santos continues to monitor costs.

“When I joined the company in February, I said the first priority was to assess the company’s assets and deliver the appropriate organisational structure to ensure that Santos is sustainable in a low oil price environment.”

“Our goal is to be free cash flow breakeven at between US$35 to US$40 per barrel on a portfolio basis.

“We have made good progress in the first half towards this goal and are forecasting a free cash flow breakeven oil price of US$43.50 per barrel for 2016, down from US$47 per barrel.(1)

“The establishment of the new operating model for Santos will lift productivity and drive long-term value for shareholders in a low oil price environment. Our asset-focused model is supported by strong technical capabilities in exploration, development, production and commercial.

“The appointment of the new Executive team (Excom) was a key step in establishing the new operating model.

“Our progress is also evidenced by record production and significant cost reductions achieved in the first half: unit upstream production costs were down by 15% to US$8.80/boe and capital expenditure down by 58% to US$283 million.

“But there is still a lot of work ahead of us.

“Our near-term focus is clear: embed the new operating model, drive down costs and apply available cash flow to reduce debt.

“I am confident we are taking the right steps to ensure Santos becomes a strong and sustainable business,” Mr Gallagher said.

First half production was up 10% to a record 31.1 mmboe, primarily due to the start-up of GLNG train 1 in September 2015 and train 2 in May 2016. GLNG produced 1,958,000 tonnes of LNG in the first half and shipped 32 cargoes, taking the total to 39 cargoes since start-up in September 2015.

Sales revenue decreased by 6% to US$1.2 billion. The positive impact of a 32% increase in sales volumes was more than offset by lower oil and oil-linked LNG prices. The average realised oil price fell 29% to US$42.79 per barrel while the average LNG price was 42% lower at US$5.70/mmbtu. Notwithstanding the lower LNG prices, LNG sales revenue was up 11% due to the start-up of GLNG and strong performance from PNG LNG and Darwin LNG.

Unit upstream production costs dropped 15 per cent to US$8.80 per boe primarily due to cost savings in operated and non-operated assets. Cooper Basin, PNG LNG and Bayu-Undan unit production costs were 15 per cent, 16 per cent and 12 per cent lower respectively.

These cost reductions were partially offset by higher GLNG production costs due to the start-up of the upstream facilities in the second half of 2015 in-line with LNG plant start-up.

Other operating costs, including LNG plant costs, increased due to higher pipeline capacity charges in the Eastern Australia business, recognition of an onerous contract for pipeline capacity (US$26 million) and higher LNG plant costs due to the start-up of GLNG trains 1 and 2.

EBITDAX fell by 39 per cent to US$491 million primarily due to lower oil and oil-linked LNG prices, and higher other operating costs, partially offset by higher LNG sales volumes due to the start-up of GLNG and lower unit production costs.

Net finance costs increased by 34 per cent to US$131 million. Lower interest expense due to lower debt levels was more than offset by lower interest capitalised due to the commissioning and start-up of the GLNG upstream and downstream facilities. The weighted average effective interest rate on debt was 4.8% in the first half.

Operating cash flow was down 30% to US$291 million, reflecting the lower operating result. Proceeds from asset sales were US$411 million, primarily due to the sale of the Kipper asset. Including asset sales, the company generated US$311 million in free cash flow before financing in the first half.