Australia's Santos Inks Natural Gas Deal with Petronas

Australia's Santos has locked in long-term sales of 2 million tons a year of liquefied natural gas from its Gladstone project, more than half the expected output and half a year ahead of its own deadline.

Analysts say the deal with Malaysia's Petroliam Nasional Berhad, also known as Petronas and a 40 percent owner of Gladstone, is a positive development for the project, which aims to convert coal seam gas to LNG for export -- an untested technology.

"They're clearly not struggling to sign on customers. Other parties that were wavering on buying are now forced to make a decision quickly because there's not much uncontracted gas left," said an energy analyst from an investment bank, who declined to be identified.

Shares in Santos were up 2.7 percent at A$14.57 in late trading, after rising as much as 5 percent. The broader S&P/ASX 200 index was down 0.7 percent.

Santos said on Thursday it had signed a binding agreement to sell 2 million tons of LNG a year to state-owned Petronas for 20 years, beginning in 2014. The gas will be used in the Malaysian domestic gas market.

Santos will also have until the end of the year to decide whether to sell a further 1 million tons of LNG a year to Petronas, which owns a 40 percent stake in the Gladstone project, located in eastern Queensland state.

Although Petronas is the world's No. 3 LNG producer and the largest in Asia, analysts say its decision to import LNG from its venture project in Australia makes strategic sense.

"Petronas has largely contracted all of its conventional LNG supplies to regional markets, so it makes sense that they want to secure additional supplies for the domestic market, especially since reserves and domestic output are falling," said John Hirjee, a Melbourne-based oil and gas analyst at Deutsche Bank.

Malaysia's crude oil output has fallen to 550,000 barrels per day (bpd) this year from 600,000 bpd in 2008, as aging fields took their toll after years of steady production levels, Petronas' chief executive said told Reuters in an interview earlier this month.

And according to forecasts by research firm Business Monitor International, Malaysia's power generation capacity is expected to increase by 58 percent between 2007 to 2018 to reach about 150 terawatts per hour.

Officials from Petronas have previously said it would consider importing LNG to meet domestic gas demand when economic growth picks up in Malaysia.

"Petronas recognized that there are other buyers out there who are also seeking to purchase from us, so they've decided to put their foot in from the get go and do it in a big way," Santos Chief Executive Officer David Knox said on a conference call.
     
No Shortage Of Buyers

Santos said the terms and prices of the Petronas deal were confidential but in line with the wider industry. The deal is also subject to the Gladstone LNG project reaching a final investment decision, expected in the first half of next year.

The firm is also continuing discussions with other parties for the remaining 1.5 million tons per annum (mtpa) of LNG from the Gladstone project that is still uncontracted, and may also sell a stake in the project, Santos' Knox said.

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According to local media reports, South Korean energy firm Korea Gas Corporation (KOGAS) is in talks to buy LNG from Santos' Gladstone LNG plant.

Santos and Petronas are planning to build a A$7.7 billion (US$6.1 billion) LNG facility with an annual output of 3.5 million tons in the first phase using coal seam gas as a feed, with first LNG production scheduled in 2014.

Knox also reiterated that Santos was open to consolidating its Gladstone project with others that are being planned in the vicinity.

"We're happy to consolidate with whoever that is ready to go and it would be much easier if the project is in the similar timeframe as ours. We've got land space for five trains so there's space for additional expansion," Knox said.

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