How Origin can pull the plug on gas and top Australia’s clean-energy leader board!

Credible plans for Australia’s decarbonisation are constantly released into the wild, offering encouragement at the very least, that if the Government were to take responsibility and set a path for the country’s low-carbon future, there’s plenty of science and economics to back such decision making.

This morning brought an interesting twist, when energy market analyst ITK Services brought market intel, Government bullishness on gas, and economics, to bear on a plan for Origin Energy to emerge from its fossil-fueled malaise as a powerful player in renewable-energy retail and export.

On Friday, Origin wrote down the value of its business by $1.5 billion, as the costs of gas and coal generation continues to be undermined by the participation of increasing levels of low-cost renewable energy in Australia’s grid. 

The company also issued notice of a further $669 million one-off loss in the form of deferred tax liability by its Asia Pacific LNG (APLNG) operations — a joint venture with ConocoPhillips and Sinopec.

ITK was poised to take up the challenge of transformation with its report, Origin Energy: Time to leave its origins behind, which was commissioned by the influential Lock the Gate Alliance, a grassroots organisation championing regional ambitions to take control over inappropriate mining and gas exploration and instead promote sustainable solutions to food and energy production.

How to be buoyed by the natural gas plume

The plan, for a turnaround of Origin’s business, made by ITK principal, David Leitch — who may be the first to fashion a silk purse out of Scott Morrison’s sow’s ear of stubborn adherence to gas development in Australia — is that Origin should sell its share (37.5%, worth an estimated $8 billion) of APLNG while Government hyping of gas is running hot and demand for the product is still high. 

It would then channel those funds into a massive solar and wind portfolio to give climate-savvy energy retail customers what they want, as well as fuelling expanded hydrogen export ambitions — which are, incidentally, also currently supported by the Federal ruling coalition.

“Origin’s electricity business has been a long-term poor performer,” says Leitch in a statement accompanying his report, because he says, the company “doesn’t stand for anything.

“Its mixed portfolio of gas and oil exploration, together with electricity,” posits Leitch, “has not been valued by investors, leading to long-term share price underperformance.”

Diversification is smart, but is it the right mix?

Origin CEO, Frank Calabria, conceded on Friday that impacts of lower wholesale electricity prices, combined with higher commodity prices for the coal and gas needed to fire its power stations were likely to take an ongoing toll on the company well into 2022.

But he added that these losses are expected to be “largely offset” by higher earnings from Origin’s LNG assets as post-pandemic economies rebound, again driving up oil and gas prices — a benefit, he said, of the company’s “diversified business”.

Leitch, on the other hand, says two of Origin Energy’s main assets, APLNG and Eraring power station, have relatively short life spans — of 17 and 10 years, respectively — and the company needs to “replace the operating profits those assets supply”.

Instead of applying the old salve of savings in capital and operating costs to its wounds, as proposed by Calabria, ITK proposes that Origin could “invest in a brand that actually means something to consumers, to become the first large-scale gentailer to offer a genuinely differentiated product”.

Eraring, argues Leitch, will soon incur substantial decommissioning and clean-up costs; the market for gas, which contributed 44% of the growth in annual global carbon emissions between 2010 and 2019 will soon suffer retribution at the hands of decarbonising states.

In addition, the cost of potential gas extracted from Origin’s multi-year Betaloo Basin project is likely to be prohibitive. Leitch predicts “zero-to-negative demand growth”, even if the product is found to be viable.

Time to switch out and switch over

In contrast, he says, “there likely is a large market for a pure green electricity retailer”; and Origin is already an investor in such a proven brand, with a 20% stake in Octopus Energy.

Furthermore, says Leitch, “Green hydrogen and/or ammonia offers a path to the future.” After divesting itself of both APLNG and whatever promise lies in Beetaloo, Origin could develop a “real winner” renewable-energy retail business; and translate its successful management of APLNG’s upstream gas extraction into an export-focused hydrogen/ammonia business, shipping clean energy to Japan and South Korea.

Although Origin does have hydrogen projects on the boil, Leitch argues it will need the capital from gas asset sales to fund bolder investments in as yet unavailable large-scale electrolysers and hydrogen production on a scale that would give Origin the edge over would-be competitors.

These are not easy choices, but Leitch says that the gas-promoting Federal environment, supported by both the Liberal Coalition and the Labor Party, “provides a window for ORG [its stock-market handle] to exit its increasingly mature, but cash-flow generative gas assets and redeploy the funds into the seemingly cutthroat, profitless electricity market”.

And although hydrogen generation also faces numerous hurdles, Australia has natural advantages in the emerging market: principally the highest producing and therefore lowest cost solar-and-wind starter packs, and “plentiful Government support”. This plays perfectly, he says, to the global sense of urgency to develop hydrogen at scale. 

Familiar argument, renewably engaging

Is ITK Services’ report a metaphorical solution for the larger Australian energy malaise: be bold, be a leader, stand for something, look to the future, stand with the people’s needs and aspirations? 

Experience has shown that commercial organisations can frequently provide the example that government needs to envisage viable, sustainable business plans. See the rolling wave of companies signing up to the RE100 initiative as an example.

Ethinvest, a financial practice which supports activism that brings shareholder sustainability concerns to bear on companies, and an investor in Origin Energy, responded to an advance copy of the Lock The Gate-commissioned ITK report:

Its Managing Director, Trevor Thomas, said, “Origin Energy faces an existential crisis in a decarbonising world.

“This timely report outlines a pathway for shareholders to regain value from a company that has been a persistently disappointing investment.”