Santos Seeks to Sell 15% of Gladstone LNG Project

SYDNEY (Dow Jones Newswires), Aug. 26, 2010

Santos said Thursday it hopes to sell 15% of its proposed liquefied natural gas project in Queensland state to customers after it reported an expected surge in first half profit underpinned by higher oil prices.

Santos said that although it will be able to sign-off on the multibillion development with partner Petronas at the end of 2010 without signing another customer, offtake negotiations with more potential Asian buyers are at an advanced stage.

Santos currently owns 60% of the project and Petronas 40%. They hope to ship LNG from 2014.

"Forty-five percent is a good guide of where we'll end up but there is a possibility that we could go a bit lower," Chief Executive David Knox told analysts on a conference call, adding that "we'll always remain the largest shareholder in the project".

His comments indicate that Santos is becoming increasingly confident about signing more customers, despite concerns of a regional LNG supply glut. They also show that Santos remains bearish on the prospect of merging with rival LNG projects as this would involve lowering its stake more substantially.

Santos and Petronas want to sanction their project's first 3.5 million metric ton per annum production train by Dec. 31 and make a final investment decision on the second train 12 months later. The joint venture has already agreed to sell up to 3 million tons a year of LNG back to Petronas.

Knox wouldn't specify with whom the joint venture is talking to, but he hinted in a response to a question on a conference call with analysts that it's angling for more than one offtake deal.

"These are big complex agreements where we're both selling large quantities of LNG over 15-20 year periods," Knox said. "But they're also coming into the equity of the project from the coal face all the way to the export stage, so both of these deals are big."

Knox declined to comment specifically on reports that Korea Gas Corp. has recently said that it expects to sign an offtake deal with Santos by the end of September. China's Sinopec has confirmed that it's held talks with Santos.

Adelaide-based Santos said the new deals would underpin offtake from both proposed trains. "The buyers will take offtake probably from the first and second train," Knox said.

The joint venture is one of four that want to build massive LNG projects fed with coal seam gas at the port town of Gladstone to tap Asian demand for cleaner-burning fuels. Santos's venture and a rival BG Group PLC project have both received environmental approval from Queensland's state government and are awaiting federal government approval, expected within months.

Knox reiterated that consolidation between rival projects would improve their economics amid continuing speculation from analysts that Santos and Petronas could do a deal involving Shell's rival development.

"The issue for us is we're now very close to FID and approaching it fast," Knox said. "At this time I'm not closing the door on discussions but it looks to me that it's going to be hard to announce anything prior to FID."

His comments contrast with the Chief Executive Origin Energy Ltd., Grant King, who said Tuesday that "the time has come" to start discussing potential merger deals. Shell has also expressed enthusiasm for consolidation but BG has said it will consider collaboration "where it doesn't slow us down".

Santos's and BG's projects are considered by analysts to be ahead of the pack at Gladstone because they've already signed at least one customer and obtained state regulatory approvals. There are some concerns, however, on whether Santos will be able to prove up enough gas reserves to support a two-train development and Origin's joint venture with ConocoPhillips has superior gas reserves, having already agreed to sell some feed gas to BG's project.

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