Santos Sells Lng Stake For $2.6b

Sydney Morning Herald

Friday May 30, 2008

Jamie Freed

SANTOS will fill its coffers with $US2.5 billion ($2.6 billion) after it yesterday agreed to sell a 40 per cent interest in its $7.7 billion Gladstone liquefied natural gas project to the Malaysian energy giant Petronas.

The deal - which the Deustche Bank analyst John Hirjee termed an "outstanding result" - values Santos's Queensland coal-seam gas resources even more highly than BG Group's bid for Origin Energy.

Santos shares surged 10 per cent, or $2.10, higher to $21.08.

Santos and its adviser Citi searched for months for the right partner to help enhance the credibility of Santos's project, which is similar to BG's planned $8 billion Gladstone development in partnership with Queensland Gas.

There was speculation Shell, ENI, ConocoPhillips and Repsol were contenders for the stake.

The Petronas-Santos deal values the Australian company's proven and probable reserves at $4.91 a gigajoule (GJ).

This year, BG paid an average of $1.58 a GJ for a portion of Queensland Gas's upstream proven and probable reserves to fuel its rival project.

"This is a new benchmark [price] for eastern Australian gas," said David Knox, the acting chief executive of Santos.

In addition to a 40 per cent stake in the LNG plant, Santos has sold Petronas an equivalent stake in the coal-seam gas resources needed to feed the first two production trains.

Mr Knox said the first train was likely to produce 3 million tonnes a year, and the company was seeking environmental approval to produce up to 10 million tonnes a year at its Curtis Island site.

State-owned Petronas, Asia's largest LNG producer, has agreed to pay Santos $US2 billion after it receives Foreign Investment Review Board approval. It will pay another $US500 million when they reach a final decision to build a second production train. The first train should start production in 2014, with a second train expected around 2016 and a third around 2020.

It is understood to be a "watertight" transaction, meaning Santos would receive the $US2 billion cash and Petronas its interest in the Fairview and Roma coal-seam gas fields even if an investment decision on the first train was delayed.

An LNG plant based on coal-seam gas resources has never been built, but there are four such proposals in Gladstone.

"We have first-mover advantage," Mr Knox said. "We have a fantastic partner."

He said not all reserves would be firmed to a bankable stage before the project was approved. Each train needed about 5 trillion cubic feet of gas to ensure 25 years of production.

The chief financial officer of Santos, Peter Wasow, said the company would now have enough cash to fund the project until at least the end of next year. Future funding options could include "a large-scale rights issue" or asset sales.

© 2008 Sydney Morning Herald

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