Pressure on Santos to buy into PNG pipeline [18jan06]

OIL and gas giant Santos is almost certain to become a part-owner and gas consumer of the mooted $4 billion gas pipeline between Australian and Papua New Guinea, energy analysts said yesterday.


Pressure on the Adelaide-based firm has been ratcheted up this week after the Australian Gas Light Co said it had fast-tracked settlement of a 10 per cent equity stake in the project and committed to a 20-year purchase of gas valued at $4.5 billion.

JPMorgan researchers concluded that AGL moved now because of the project's growing valuation, which forced the company to pay an extra $US100 million ($A133 million) for its stake.

"We expect Santos to back in to the project in the first quarter of 2006 and commit to take about 50 petajoules a year," JPMorgan said.

ABN Amro energy analyst Aiden Bradley said Santos's cash outlay would be minimised because it already had a 25 per cent working interest in PNG's greater Hides gas field.

Mr Bradley expects an announcement from Santos in the second quarter in conjunction with the completion of engineering and design work.

Santos has consistently declined to comment despite being locked in talks for months with the PNG Government and Oil Search, the majority partner in the consortium backing the 1200km pipeline.

But analysts say using Santos's Moomba facilities in South Australia as the national gas distribution point adds to the economic viability of the pipeline, which is expected to get a green light this year for completion by 2009.

"With the gas going to Moomba it would serve the mutual benefit of the consortium and AGL and potentially Santos but it really does not work without Santos," one commentator said.

The key issue to resolve appears to be PNG's reluctance until now to allow the exporting of liquid or "wet" gas.

Enter Santos, which needs the wet gas at its Moomba plant to compensate for the dwindling supplies of oil and gas from its Cooper Basin assets in central Australia. Oil production in the 50,000sq km area peaked in 1986 and has declined steadily since then. That reality has led analysts to predict Santos, like AGL, will move to become a 10 per cent stakeholder in the pipeline and lock in a 20-year agreement to buy gas valued at up to $6 billion.

Santos, which posted a record first-half profit of $289.5 million, forecast a 17 per cent spike in oil and gas production last year to 55 million barrels.

Most analysts yesterday welcomed AGL's decision to settle its participation in the pipeline at least six months ahead of schedule.

"The deal has no valuation impact but should bring forward an earnings boost and further highlights AGL's confidence in the PNG gas project moving ahead," ABN Amro analysts wrote.

Goldman Sachs JBWere was equally upbeat.

"While AGL's purchase price for PNG entry has increased, we believe it remains attractive on a per barrel of oil basis and creates certainty of outcome for the proposed demerger of the energy business," the firm noted.

Oil Search shares continued to climb on the market yesterday, rising 6¢ to $4.08 with AGL up 2¢ to $17.02 and Santos 8¢ to $12.69.