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Santos cements gas supply deal with Petronas

Financial Times

By Peter Smith in Sydney

Published: June 19 2009 03:00 | Last updated: June 19 2009 03:00

Santos, the Australian energy group, has strengthened its links with Petronas after signing a supply agreement with the Malaysian oil and gas company for its proposed Gladstone liquefied natural gas (GLNG) project.

Petronas has agreed to buy 2m tonnes of gas a year from the project for 20 years from 2014, with the option of a further 1m tonnes.

The customer agreement is a milestone for GLNG, a 60/40 joint venture between Santos and Petronas. It comes weeks after the UK’s BG Group also signed its first supply agreement for Australian liquefied natural gas with CNOOC of China.

Santos/Petronas, BG and at least two other large consortiums are vying to develop reserves of coal bed methane – liquefied natural gas produced from coal deposits – in the Australian state of Queensland.

Other consortiums include a venture between Royal Dutch Shell and Australia’s Arrow Energy, and a combination of Australia’s Origin Energy and ConocoPhillips of the US.

All are trying to develop the reserves to feed energy hungry markets in Asia. Securing customers is critical as they invest billions of dollars in development.

Analysts expect the consortiums to consolidate into two groupings and believe Santos/Petronas and BG are well positioned. Origin/Conoco has yet to secure a foundation customer, while the Shell/Arrow team have the smallest reserves.

David Knox, Santos chief executive, said GLNG was in discussions with other parties. “It’s a firm 2m tonne deal we’ve done with Petronas last night, and we have the option to sell another 1m tonnes by Christmas time – and then we’ve probably got another half million tonnes available to other customers.”

Santos did not disclose the value of the supply agreement but Mr Knox said it was “in line with recent industry practice for long term contracts”.

The Australian group hopes to reach a “final investment decision” on GLNG in the first six months of 2010, ahead of its rivals, with maiden gas shipments in 2014.

Santos has 12 customised rigs operating and plans to build a 435km pipeline, capable of supporting three production lines at its Curtis Island processing plant at Gladstone.

CNOOC has agreed to buy 3.6m tonnes of liquefied natural gas a year for 20 years from BG and is taking small stakes in the UK group’s plant and some gas fields. The supply represents about 5.3bn cubic metres of gas a year, roughly 8 per cent of Chinese demand.

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