"Petronas is the ideal partner to help develop Santos' coal seam gas to LNG strategy and their investment significantly advances the project," Santos Chairman Stephen Gerlach said in a statement.
Santos said Petronas will make an initial cash investment of $2.01 billion, plus a further $500 million on reaching a final investment decision for a second LNG train at the Gladstone project, located in Queensland state.
The deal marries Santos's reserves with the marketing power of Petronas, the third-largest LNG producer in the world. Santos shares jumped 10.12 percent to a record high of A$20.90 in the afternoon session.
The race to build coal seam gas-fuelled LNG plants on Australia's east coast has stepped up after BG proposed a takeover of Origin, which holds the largest coal seam gas resources in Queensland state.
Santos, which also has a stake in a proposed Exxon Mobil-led LNG project in Papua New Guinea and a share in an operating LNG plant in northern Australia, has been seeking to expand its LNG business in a bid to gain from rising prices and a forecast surge in global demand.
The transaction sells a third of Santos' coal seam gas proven plus probable (2P) reserves and less than 11 percent of Santos' total proved and probable (2P) oil and gas reserves, Santos said in a statement.
Under the agreement, Santos and Petronas will form a joint venture company to develop and operate a 450 kilometre gas pipeline and an LNG plant at Gladstone. The plant will have an initial capacity of 3 million tons a year.