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Santos and PETRONAS sign partnership for Gladstone LNG (announcement, presentation & conference call)

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Matthew Doman Andrew Nairn
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PETRONAS to acquire a 40% interest in project for US$2.508 billion

Following a worldwide tender process, Santos has selected PETRONAS, one of the world’s largest LNG producers, to be its 40% partner in the development, operation and marketing of the company’s proposed Gladstone LNG (GLNGTM) project. PETRONAS will make an initial cash investment of US$2.008 billion, plus a further payment of US$500 million upon reaching a Final Investment Decision for a second LNG train.

The GLNGTM agreement with PETRONAS establishes a new benchmark for the value of eastern Australian gas resources and represents a major step towards realisation of Santos’ Coal Seam Gas (CSG) to LNG strategy. The transaction sells a third of Santos’ CSG proven plus probable (2P) reserves and less than 11% of Santos’ total 2P oil and gas reserves.

On an equity basis, PETRONAS is the largest LNG producer in Asia and is the third largest in the world. The company operates the PETRONAS LNG Complex in Bintulu, Sarawak, which is the world’s largest integrated LNG facility with a total capacity of approximately 23 mtpa from 8 LNG trains. PETRONAS is also a partner in the ELNG Project in Egypt and in the Dragon LNG Project in Wales. It is the world’s largest single owner-operator of LNG ships and has long standing relationships with an extensive base of high volume LNG customers in Asia.

The agreement fully aligns the interests of both companies across all strategic elements of the value chain from resources to plant development and operation, and LNG marketing. CSG resources will be drawn from Santos’ Greater Fairview and Roma fields with Santos remaining the upstream operator.

Santos and PETRONAS will form a 60/40 joint venture company to:

  • Develop and operate the 450 km gas pipeline to Gladstone;
  • Develop and operate the LNG liquefaction plant on Curtis Island at Gladstone with initial capacity of 3mtpa. Technical expertise will be provided by PETRONAS; and
  • Undertake all marketing activity, accessing PETRONAS’ well-established customer base in the three largest Asian LNG markets of Japan, Korea and Taiwan.

Underlying assets will be held directly in a traditional unincorporated joint venture.

Santos’ Chairman, Stephen Gerlach, said “PETRONAS is the ideal partner to help develop Santos’ CSG to LNG strategy and their investment significantly advances the project. Today marks an important step towards realisation of Santos’ vision to be the leading Australian energy company in Asia.

“Together we will maximise the future value of the integrated GLNGTM development in the context of a long term, fully aligned partnership.

PETRONAS President & CEO Tan Sri Mohd Hassan Marican welcomed the new partnership with Santos.

“While PETRONAS is already a major LNG player, the GLNGTM partnership with Santos is strategically very important to us as it provides an excellent growth opportunity to our LNG business. We look forward to a mutually beneficial partnership,” Tan Sri Mohd Hassan said.

PETRONAS has over the last 25 years earned a reputation as a stable and reliable LNG supplier. It has to date delivered more than 5,500 LNG cargoes from the Bintulu Complex to its customers safely and on schedule.

Santos’ Acting CEO, David Knox, said today’s announcement followed an extensive selection process undertaken over the last four months.

“We are very pleased to be entering a long term, fully aligned venture with PETRONAS to develop GLNGTM. Both parties are fully committed to the rapid development of GLNGTM and our partnership also provides clear scope for broader regional cooperation.”

Proceeds from the transaction will be used to fund the Company’s significant pipeline of growth projects combined with general corporate purposes consistent with Santos’ policy to maintain an investment grade credit rating.

Since announcing Santos’ intention to develop an LNG project at Gladstone in July 2007, rapid progress has been made. The project has achieved a number of important milestones during 2008, including the commencement of dual pre-FEED studies conducted by Foster Wheeler and Bechtel, and the lodgement of environmental applications.

The project is on track to enter FEED in late 2008 and reach FID by the end of 2009/early 2010 with first LNG expected in 2014.

Completion of the transaction is conditional upon Foreign Investment Review Board and other usual regulatory approvals. Payment will occur as soon as these approvals are obtained.

1 “CSG reserves and resources” means 3P CSG reserves and high side contingent resource estimate

Download the conference call about the PETRONAS partnership (MP3 41 Mb)