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Petronas pays Santos $2.5 bn for LNG stake


May 30, 2008

Petronas pays Santos $2.5 bn for LNG stake

Malaysian state oil company Petronas will buy a 40 percent stake in Australian energy firm Santos Ltd's Gladstone liquefied natural gas project for up to $2.51 billion, to bolster its position as Asia's largest LNG producer as competition hots up, reported Reuters.

State-owned Petronas' investment in the project, which plans to use coal seam gas as feedstock, follows a $12 billion takeover bid by Britain's BG Group Plc for Australia's Origin Energy Ltd last month, and is seen as a vote of confidence for Asia's young coal seam gas industry.

"As for Santos, on first glance it looks like they've got an excellent deal," said Aiden Bradley, an oil and gas analyst at ABN AMRO in Sydney.

"For Petronas, their LNG production in Malaysia is not growing so this is part of their strategy to diversify in Asia."

The deal marries Santos's reserves with the marketing power of Petronas, the third-largest LNG producer in the world. The acquisition is Petronas' first investment in coal seam gas, and its first foray in Australia.

Petronas will make an initial cash investment of $2.01 billion, and a further $500 million on reaching a final investment decision for a second LNG train at the Gladstone project, located in Australia's Queensland state, Santos said in a statement.

With oil prices rising and buyers looking for cleaner-burning fuel, global LNG demand is forecast to rise to nearly 400 million tonnes per annum (mtpa) in 2020, up from 172 mtpa in 2007. Asian demand, which accounts for two-thirds of global LNG consumption, could grow to just above 200 mtpa in 2020.

Under the agreement, Santos and Petronas will form a joint venture company to develop and operate a 450-kilometre gas pipeline and an LNG plant at Gladstone. The $6.3 billion plant will have an initial capacity of 3 million tonnes a year and is expected to begin operations in 2014..

The transaction sells a third of Santos' proven plus probable (2P) coal seam gas reserves and less than 11 percent of Santos' total proved and probable oil and gas reserves, Santos said.

Petronas' investment would value its share of Santos' 2P reserves at A$4.91 per gigajoule (GJ), or A$1.65 per GJ if using the largest estimate of the coal seam gas reserves, Santos said.

The race to build coal seam gas-fuelled LNG plants on Australia's east coast has stepped up after BG's proposed takeover of Origin, which holds the largest coal seam gas resources in Queensland state.

Santos, which also has a stake in a proposed Exxon Mobil-led LNG project in Papua New Guinea and a share in an operating LNG plant in northern Australia, has been seeking to expand its LNG business in a bid to gain from rising prices and a forecast surge in global demand.

"Petronas is the ideal partner to help develop Santos' coal seam gas to LNG strategy and their investment significantly advances the project," Santos Chairman Stephen Gerlach said in a statement.

Petronas operates the 23-million-tonne-a-year Bintulu LNG complex in Malaysia's Sarawak state. It is also a partner in a LNG project in Egypt and in the Dragon LNG Project in Wales.

Santos said the Gladstone LNG project, which has begun early engineering studies, was on track to enter the engineering design phase in late 2008 and reach a final investment decision by early 2010, with first LNG output target in 2014. Santos said the deal was subject to approval by Australia's Foreign Investment Review Board and other usual regulatory approvals.

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