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Santos today announced the next major step in its Australian coal seam gas (CSG) strategy with the acquisition of significant additional acreage in the Gunnedah Basin in northern New South Wales and an investment in leading local CSG company, Eastern Star Gas Limited (ESG).

Key elements of the $476 million transaction include:

  • the acquisition by Santos of Gastar Exploration Limited’s 35% interest in various Gunnedah Basin exploration permits and production areas operated by ESG for $300 million;
  • the acquisition by Santos of a 19.99% interest in ESG from Hillgrove Resources Limited for $176 million.

Santos and ESG’s combination of operated CSG permits in the Gunnedah Basin will cover a total area of around 63,000 square kilometres. The resource potential of this area is estimated to exceed 50 trillion cubic feet. The combination will consolidate the leadership position of both Santos and ESG among the 15 companies active in CSG acreage in NSW.

Santos entered the Gunnedah Basin in 2007 and is currently undertaking a 23-well drilling program. ESG began exploring the area in late 2002 and is widely recognised as the leading independent explorer in the region.

The transaction announced today builds upon this presence and provides a basis for each party to work together to accelerate the development of the region and a range of commercialisation opportunities, including domestic gas supply, power generation and future LNG options.

Santos Chief Executive David Knox said: “This is a significant step in our Gunnedah Basin strategy.  Combining the proven CSG expertise of Santos and Eastern Star with the ability of Santos to deliver major projects and develop various channels to market will advance the region’s potential as Australia’s next major CSG province – bringing jobs and investment to the area.”

“We look forward to working with ESG towards this goal,” he said.

Mr Knox said the development of NSW’s abundant coal seam gas resources presented an exciting opportunity to deliver “carbon light” gas fired power generation.

ESG’s Chief Executive David Casey said: “We are excited to welcome one of Australia’s largest CSG players as a joint venture partner and strategic shareholder in what is a major milestone for ESG.  We have said before that ESG is market constrained rather than resource constrained – we expect that this transaction will play a key part in removing that constraint and unlocking value for both parties.”

The consideration being paid to Gastar equates to $0.66 per GJ of current 3P reserves.  Santos will pay a further $20 million to Gastar if ESG meets certain reserve targets by 31 December 2009.

Santos’ acquisition of a 19.99% interest in ESG represents a strategic investment that will align the interests of the respective joint venture partners.  Santos will pay $176 million for the interest, equating to a price of $1.00 per ESG share.  Santos has agreed to make an additional payment to Hillgrove in the event that any party completes the acquisition of a beneficial interest of more than 50% in ESG at a price in excess of $1.00 per share within 18 months.