Could Japan's 'flexible measures' on LNG emissions boost the Santos share price?

Axing the Santos led offshore Barossa project would come as a blow to investors, who've enjoyed an 8% boost in the Santos share price so far in 2023.

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The Santos Ltd (ASX: STO) share price would likely take a material hit if the $5.8 billion Barossa gas project gets the axe.

Some environmentalists might cheer that outcome.

But, atop diminishing global gas supplies, it would come as a blow to investors, who've enjoyed a 7.5% boost in the Santos share price so far in 2023. And that's not factoring in the record-high 22.4 cents final dividend, paid out on 29 March.

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The S&P/ASX 200 Index (ASX: XJO) oil and gas stock, along with its Japanese and Korean joint venture partners JERA and SK Group, made the final investment decision (FID) for Barossa back in March 2021.

And the project, which is located in the Timor Sea, was given the thumbs up by the National Offshore Petroleum and Safety Environmental Management Authority (NOPSEMA).

But in a potential blow to the Santos share price, Barossa's development could be at risk from the Labor government's stringent carbon emissions reduction plans, unveiled at the end of March.

That's a risk that the Japanese government is less than pleased with.

What is Japan asking the Australian government to do?

The Japanese government is concerned not so much for the Santos share price, but for Japan's own energy security as Labor's new safeguard mechanism rules begin to bite.

As The Australian Financial Review reports, Japan has asked the Albanese government for an "immediate and sincere" reply to questions it submitted about the safeguard mechanism three weeks ago.

Despite moving the goalposts on the Santos-led Barossa project in mid-game, Energy and Climate Change Minister Chris Bowen noted:

The government engaged extensively in developing the policy and has worked closely with key trading partners including Japan to ensure the scheme design is well understood.

But the Japanese government still has significant concerns over Labor's new policies, including the fact that the stricter emissions regulations are retroactive.

According to a spokesman for Japan's Ministry of Economy, Trade and Industry (METI):

We have been indicating our concerns about the impact of Australia's safeguard mechanism reform to the Australian government as Minister [Yasutoshi] Nishimura said on June 16… As the Australian government has the political authority, we are waiting for their response.

METI's spokesman said he's been in discussions with Bowen and has "requested flexible measures" when it comes to the emissions from the Santos-led Barossa project, and LNG projects more broadly.

That kind of flexibility would likely offer some healthy tailwinds for the Santos share price.

The spokesman noted that Japan's Prime Minister Fumio Kishida "also made a similar request to Prime Minister Albanese".

The METI spokesman added (quoted by the AFR):

We will continue making the utmost efforts for environmental measures, but will also continue consultations with the Australian government regarding measures for protecting Japanese investors and ensuring a stable supply of LNG, in order to find a mutually acceptable solution.

Santos hopes to restart drilling at the Barossa project within the next six months.

Santos share price snapshot

Excluding dividends, the Santos share price is up 2% over the past 12 months.

Motley Fool contributor Bernd Struben has no position in any of the stocks mentioned. The Motley Fool Australia's parent company Motley Fool Holdings Inc. has no position in any of the stocks mentioned. The Motley Fool Australia has no position in any of the stocks mentioned. The Motley Fool has a disclosure policy. This article contains general investment advice only (under AFSL 400691). Authorised by Scott Phillips.

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