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Timing is key for Santos

Stephen Bartholomeusz

Published 6:25 AM, 23 Jul 2010 Last update 10:10 AM, 23 Jul 2010


The Santos second quarter activities report doesn’t shed much light on the progress of negotiations that could be critical to the shape and fate of its proposed Gladstone LNG project. However, shareholders will be encouraged that the negotiations disclosed earlier this month are still occurring.

Since the existence of the discussions was confirmed by Santos nearly a fortnight ago it has become even more apparent that Santos needs some kind of deal with a major third party if it wants to leverage its world-class coal seam gas reserves in Queensland into a world-scale export LNG project without betting its own existence on the project.

With the costs of the projects escalating, gas prices deflating and the number of potential core customers dwindling, the risks for Santos of going it alone with its 40 per cent partner, Malaysia’s Petronas, are rising.

Fortunately for Santos, thanks to the prescience of former chief executive John Ellice-Flint in recognising the potential of unconventional gas, its reserves position provides it with a lot of leverage in the discussions that could shape the entire Queensland LNG sector. With Origin Energy, Santos has the reserves to underwrite the prospects of the four multi-train projects on the drawing boards.

The disclosure of the discussions sparked immediate speculation that Santos was negotiating with the Shell/PetroChina partnership, which has belatedly entered sector with its bid for Arrow Energy. Arrow, however, isn’t deemed to have the resource base to support their ambition of building a three or even four-train facility and therefore it would make sense for them to try to strike some kind of deal with Santos.

From Santos’ perspective, a relationship with Shell and PetroChina would add to the credibility of its own plans, perhaps help with an otherwise daunting funding task if its GLNG were to pursue a two-train project on its own, perhaps help secure another major customer and greatly improve the economics of a multi-train facility.

Santos was careful today to essentially re-state what it said earlier in the month. GLNG remains in detailed discussions with a number of parties in relation to potential LNG sales, equity in the project and collaboration between projects, it said. Santos is known to have had discussions about collaborating with another Queensland LNG player, BG Group, in the past.

Since the original confirmation of discussions, there has been a lot of analysis of Santos’ options, which range from the merging of GLNG with another project, to construction of a shared facility, to simple collaboration to reduce construction and infrastructure costs. It would be possible to have one multi-train facility where the ownership interests in the different trains and their output varied.

The market appears concerned that Santos might want/have to go it alone, with an off-take agreement with Petronas sufficient only to underwrite a sub-scale single-train project. The concern would be even greater if Santos committed to a two-train project without committed buyers for all the output, given that in the near term, at least, there is likely to be an over-supply of LNG in the region.

While it raised $3 billion of new equity last year to shore up the funding for the initial train, should it proceed, the market also worries about the extent to which Santos would have to again call on shareholders for more capital if it doesn’t do some kind of deal that shares the costs with another player or players.

A final investment decision on GLNG was originally scheduled for the middle of this year but was deferred because of the threat posed by the resource super profits tax. It is now due before the end of the year.

That decision timeline, and the reality that there are other competing projects close to their own final investment decisions – and therefore there is a window of opportunity that might close and narrow the options for not just for Santos and Petronas but the other players too – creates some pressure on all the Gladstone LNG project participants to sort out the shape of the sector sooner rather than later.




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