Shares in Australia's Santos jumped over 7 percent after it said it was in talks to sell equity in its Gladstone LNG project and collaborate with others, raising expectations it may soon sign a multi-billion dollar deal with Royal Dutch Shell. Santos said it was in "detailed ongoing discussions" with a number of parties in relation to potential equity and liquefied natural gas sales, and on collaboration between projects. "These discussions are incomplete and there is no certainty that definitive agreements will be executed by the parties," Santos said in a statement on Friday. Santos was responding to a report in The Australian Financial Review that it was close to inking a A$2 billion deal with Shell to sell a 30-35 percent stake in the Gladstone coal-seam gas-to-LNG project. Citing industry sources, the paper said Santos was also close to signing long-term LNG sale agreements with China's Sinopec Corp and state-run Korea Gas Corp that are worth tens of billions of dollars.
The report sent Santos shares sharply higher and at 0318 GMT, it traded up 7.52 percent at A$13.72 per share, outperforming a flat broader market. "Shell has indicated that they are open to consolidation and it is only logical for them to talk to Santos since Shell's acreage is land-locked and is located right next to Santos' project, which has a deep-water port good for LNG ship loading," said Di Brookman, an energy analyst at CLSA Asia-Pacific Markets. A potential deal with Shell would greatly reduce Santos' burden in funding its Gladstone project and alleviate investor concerns that it would need to carry out another equity raising, after it tapped investors for A$2.5 billion last year to cover its share of costs for another LNG project in Papua New Guinea. It would also bring clout and certainty to the Gladstone project that major buyers need before they can commit to contracts worth tens of billions of dollars. "If Shell joins Santos, the credit rating for the project would go up and that will also make it easier for them to sign on major customers," Brookman said.
The Gladstone project, which will have an initial production capacity of 3.4 million tonnes per annum, is slated for an investment decision later this year, with production targeted to start in 2014. Santos owns a 60 percent stake in the project, which it estimated in 2008 would cost A$7.7 billion to build, though most analysts are expecting the cost to have increased. Deutsche estimates the cost for Santos to build two processing plants with an export capacity of 7.2 mtpa to be A$16.4 billion. Malaysian state-owned energy giant Petronas owns 40 percent, which it bought 2008 for $2.5 billion. The AFR said Shell would become the operator of Gladstone LNG plant, which will process coal-seam gas into LNG -- and incorporate its own Curtis Island LNG project into Gladstone, which is considered to have a superior site for an LNG processing facility.
A merger of projects on the plant level would yield significant economies of scale, although there could also bring risk of a delay to the project's start-up by about six months, said Adrian Wood, an energy analyst at Macquarie Group. Should a deal be done between Santos and Shell, the project merger would also hasten the pace for further consolidation in the industry, potentially drawing the Australia Pacific LNG project owned jointly by ConocoPhillips and Australia's Origin Energy to the table. There are five proposed LNG projects around Gladstone port in the northeastern Queensland state. Other projects in the pipeline include BG Group's Curtis LNG project and a smaller plant planned by Liquefied Natural Gas Ltd.