Santos-Petronas JV Charge Ahead with Gladstone Construction

SYDNEY (Dow Jones Newswires), Feb. 18, 2010

Santos said Thursday its joint venture with Petronas will officially green light the construction of their Gladstone liquefied natural gas project even if they don't find a second customer before a midyear deadline.

That means the only remaining obstacle to sanctioning the massive project is lawmaker approval of its associated environmental impact statement, or EIS, which Santos Chief Executive David Knox said is expected to occur in line with the joint venture's tight timetable.

Approval of the project would put the JV on track to release 3.6 million metric tons of LNG a year into global gas export markets by 2014. This should boost Santos' revenues astronomically but risks remain, with the jury still out on whether enough LNG demand and skilled labor exists to underpin the construction, and ongoing operation, of around a dozen planned Australian LNG projects.

Knox said he doesn't believe "there are any real showstoppers" to getting environmental approval but said "there are lots of issues that have come back to us that need consideration and discussion".

Approval of the EIS will largely determine the precise timing of a final investment decision, or FID, Knox said.

Santos on Thursday met analysts' expectations with a steep fall in annual profit, dragged down by lower oil and gas prices, but the LNG developments are more crucial to its prospects.

The company wants to sanction a doubling of the size of the Gladstone LNG project by mid-2011 but will need to find more customers and more gas to support the expansion.

For its first production train, Santos has already agreed to sell up to 3 million metric tons a year of LNG to Petronas, virtually underpinning its full 3.6 mtpa capacity.

"We would very much like to introduce another third party customer into the first train but it's not a requirement for us to move forward to FID," Knox told analysts on a conference call.

He shrugged off analysts' concerns that Santos isn't proving up its reserves quickly enough to support a second train, or that such concerns are complicating ongoing negotiations with buyers.

Santos still wants to divest another 9% of the project and Knox said that while it's getting "strong engagement" from potential takers, the stake sale component is slowing offtake negotiations.

Andrew Williams, an energy analyst at Credit Suisse, said an agreement with a more traditional, external LNG buyer would give the project more credibility, while a second train would greatly enhance its economics, given that extra trains are cheaper to build.

Williams, however, said Santos could face challenges convincing potential customers that it has enough feed gas to underpin a second train.

"Until coal seam gas establishes a bit of a track record in lager-scale sustained production, the buyers are probably going to want to see more reserves cover than you'd need for a more traditional project," Williams said.

To date, Santos has proven up just over half the reserves it will need to support a two-train project.

The company's funding outlook is also watched closely by analysts.

Despite it raising A$3 billion from a share issue last year, Santos is also involved in the construction of a US$15 billion project in Papua New Guinea, and has a more long-dated floating LNG venture with GDF Suez to consider.

While it had A$5.06 billion in cash and committed debt facilities at Dec. 31, JPMorgan reckons Santos will need to raise another A$2.15 billion if oil prices remain at US$75 a barrel and it can't sell the 9% stake in Gladstone LNG.

Knox said Santos won't provide a cost estimate for the project until it is sanctioned. He reiterated that Santos has assets in the Timor Sea that it could sell, among a number of "big levers" in its funding plans.

Last year, Knox said that there's a "sporting chance" that the company won't have to do another equity raising before 2014.

Santos' net profit for 2009 fell to A$434.0 million from A$1.65 billion in 2008 when earnings were artificially boosted by the sale of gas assets to Petronas, which currently has 40% of Gladstone LNG to Santos' 60%.

Underlying profit fell 53% to A$257.0 million.

Santos reiterated its 2010 production guidance of 51 million to 54 million barrels of oil equivalent and declared a final dividend of 20 cents a share, unchanged from last year.

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