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Petronas backs Santos LNG project

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Petronas backs Santos LNG project

By Peter Smith in Sydney

Published: May 30 2008 02:28 | Last updated: May 30 2008 02:28

World interest in Australia’s reserves of coal-bed methane was underlined on Thursday when Petronas of Malaysia agreed to invest $2.5bn in a liquefied natural gas project being developed at Gladstone by Santos, the Australian energy group.

It comes as BG, the UK oil and gas exploration group, was locked in late-stage talks to buy Origin Energy for A$13.6bn ($13bn) in cash, equalling A$15.50 a share.

The parties were working towards a deadline of making an announcement before the Australian stock exchange opened on Friday morning.

BG wants Origin in order to get control of coal-bed methane reserves in Queensland’s Bowen and Surat basins, which would then be transported hundreds of kilometres overland to the port of Gladstone.

Santos and Petronas said on Thursday they planned to build an LNG plant in Gladstone, the world’s first such project to convert coal-seam gas into LNG.

Under the deal, Petronas will take a 40 per cent stake in the A$7.7bn Gladstone project, which will have an initial capacity of 3m tonnes per annum, with first exports expected by 2014. Petronas needs to invest a further A$3bn to fund its share of the project, lifting its total commitment to nearly $5.5bn, although part of that could be debt funded.

The deal also underlines the growth in demand for gas which is increasingly recognised as a cleaner burning fuel.

“It is becoming a fuel of choice and the fuel of the future,” a person close to the deal said. “This deal underscores the viability of coal-seam gas.”

David Knox, acting chief executive of Santos, said. “No one has done coal seam gas to LNG anywhere else in the world.”

Petronas has been scouting the world for quality gas assets and is particularly interested in coal bed methane.

The Malaysian state-owned energy group is understood to have outbid rivals in the final states of an auction.

Groups that had expressed an interest in the Gladstone project included Royal Dutch ShellConocoPhillips of the US, Eni of Italy, Repsol of Spain, and Sempra, owner of the largest US natural gas utility.

Petronas will make an initial cash investment of $2bn, plus a further payment of $500m after a decision is made on a second LNG train.

BG formed a joint venture with Queensland Gas Company in February to develop an A$8bn liquefied natural gas project in Gladstone, one of four projects based on coal-seam gas.

The Petronas transaction requires approval from Australia’s Foreign Investment Review Board.

Santos was advised by Citi, with JPMorgan acting for Petronas.

EDITOR’S CHOICE

Shell plans floating LNG plant – Mar-10

Copyright The Financial Times Limited 2008

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