Santos' Narrabri Gas Project: A Pillar of Energy Security for Australia's East Coast and a Catalyst for Long-Term Value

The Australian energy landscape has long grappled with the volatility of domestic gas supply, particularly in the eastern states where demand from industrial, residential, and power generation sectors has outpaced production. Santos' Narrabri Gas Project, a $2.3 billion coal seam gas initiative in New South Wales, represents a pivotal intervention in this equation. As the project inches toward final investment decision (FID) in 2025, its potential to stabilize the east coast gas market, reduce reliance on volatile LNG imports, and unlock long-term value for Santos and energy-dependent industries cannot be overstated.

Strategic Importance for Australia's Energy Security

The Narrabri Gas Project is designed to deliver 150–200 terajoules per day (TJ/d) of natural gas, with the capacity to meet up to 50% of New South Wales' gas demand once operational in 2028. This output would directly address the chronic under-supply in the eastern basin, a region that has seen gas prices spike due to competition with LNG export projects and the depletion of legacy fields. By positioning itself as a domestic supplier, Santos is not only aligning with government priorities for energy security but also creating a buffer against price shocks from global markets.

The project's significance extends beyond volume. Its onshore location allows for lower transportation costs compared to LNG, which translates to more predictable pricing for industries reliant on gas, such as manufacturing, fertilizer production, and electricity generation. For example, the project's appraisal wells are already supplying gas to the Wilga Park Power Station, a 22-MW facility, demonstrating its immediate utility even before full-scale production. Over its 25-year operational lifespan, Narrabri could anchor a stable, low-cost energy base for New South Wales, reducing the state's exposure to the geopolitical and logistical risks of imported LNG.

Operational and Financial Discipline: A Santos Strength

Santos' disciplined approach to capital allocation and project execution is a critical factor in Narrabri's viability. The company's recent track record—nearly completing the Barossa LNG project (97% as of mid-2025) and advancing the Pikka Phase 1 project in Alaska—demonstrates its ability to manage large-scale developments while maintaining a robust balance sheet. With a gearing ratio of 20.5% and free cash flow of $1.1 billion in the first half of 2025, Santos is well-positioned to fund Narrabri without compromising its broader growth agenda.

The project's regulatory approval, including native title tribunal clearance, further underscores its legitimacy. While legal challenges have delayed timelines, Santos' proactive engagement with stakeholders and its commitment to environmental and community standards suggest a path to resolution. The company's ability to navigate these hurdles, coupled with its $2.3 billion investment, signals confidence in Narrabri's long-term returns.

Market Positioning and Long-Term Value

Narrabri's impact on Santos' portfolio will be transformative. The project is expected to generate 1,700 jobs during construction and 200 operational roles, aligning with Australia's push for domestic job creation. More importantly, it diversifies Santos' production mix, which is currently skewed toward LNG and oil. By adding a stable onshore gas asset, the company can hedge against commodity price swings and ensure a consistent cash flow stream.

For energy-dependent industries, the project offers a lifeline. The Australian Industry Group has repeatedly highlighted the threat of high gas prices to manufacturing competitiveness. By securing a domestic supply, Narrabri could lower energy costs for industries such as aluminum smelting and chemical production, which are critical to Australia's trade balance. This, in turn, could attract further industrial investment, creating a virtuous cycle of economic growth.

Investment Considerations

While the project's long-term benefits are clear, investors must weigh near-term risks. The native title dispute and environmental concerns—common in large-scale resource projects—remain potential headwinds. However, Santos' track record in managing complex projects (e.g., the Moomba CCS project's successful CO2 storage milestone) suggests a capacity to mitigate such risks.

From a valuation perspective, Santos appears undervalued. Morningstar analysts estimate a fair value of AUD 9.50 per share, significantly above its current trading price. This gap reflects the market's underappreciation of Narrabri's long-term potential and the company's broader growth pipeline, including the Barossa and Pikka projects. Investors with a 5–10 year horizon may find Santos an attractive play on Australia's energy transition, particularly as the government prioritizes domestic supply resilience.

Conclusion

The Santos Narrabri Gas Project is more than a resource play—it is a strategic cornerstone for Australia's energy security and industrial competitiveness. By stabilizing gas supply, reducing price volatility, and creating long-term value for both Santos and energy-dependent sectors, Narrabri addresses a critical gap in the east coast market. For investors, the project underscores Santos' role as a disciplined, forward-thinking operator capable of navigating complex challenges to deliver sustainable growth. As the final investment decision looms, the project's success will hinge on Santos' ability to execute, but its potential to reshape Australia's energy landscape is undeniable.