Australia an energy target as Iran-Israeli war triggers global turmoil

It does not appear to be a coincidence that hours after Israel started raining bombs down on Iran, one of the embattled country’s neighbours, Abu Dhabi, pounced with an audacious offer that Australian energy giant Santos could not refuse.

After making two offers over a week in March, the suitors are now putting $36 billion cash on the table, including debt, for one of our gas sector giants. If successful, it would be the largest ever cash offer in Australia’s corporate history.

The Santos gas operations are world away from the worries of Middle East conflagration and close to its lucrative Asian customers.

Abu Dhabi’s state-owned oil company, the Abu Dhabi National Oil Company, the world’s 12th largest oil company by production, is the major player behind the bid via its $US80 billion ($123 billion) overseas investment arm XRG.

This business was launched last year with a mission to meet rising global demand for lower-carbon energy and to become one of the five biggest integrated global gas and LNG businesses.

So why does a state, a part of the UAE, which is awash in oil, make such a huge bet on becoming a global LNG business?

There are two core reasons: geography and the green energy transition.

The Israel-Iran conflict, and the threat of escalation if US President Donald Trump drags the US into it, will send global oil prices soaring for one key reason: any existential threat to Iran’s leadership could lead to an effective blockade of the Strait of Hormuz.

It is a crucial choke point in the global energy supply chain, and not just for oil. Middle East LNG exports are even more reliant on the strait than is oil, and there are fewer alternatives to shipping LNG through the strait.

“In the worst-case scenario in which the Strait of Hormuz is closed, it will affect both global LNG and oil markets by up to 20 per cent of their respective annual consumption,” Citi energy analysts said this week.

“Global LNG markets will be more vulnerable than oil to further escalation of Middle East tensions.”

These Middle East petro states may be underpinned by oil sales, but LNG gives them much-needed diversification.

And LNG assets far away from the region give them pricing and supply upside from any energy price spikes triggered by these conflicts and any related supply shocks.

Santos could not be more tempting from a strategic point of view.

It would give XRG a business far from the drama of the Middle East thanks to its assets in Australia, Papua New Guinea and Alaska and close to Santos’ coveted Asian customers, which have a fast-growing appetite for LNG.

Woodside boss Meg O’Neill is the only Australian presence as US President Donald Trump and Saudi Crown Prince Mohammed bin Salman pose for a photo with business leaders attending a Saudi-US business investment forum in May. Credit: Getty Images

And what would the Santos suitors make of Australia’s comical industry, where operators get a lot of their gas royalty-free from Australians and then make a fortune selling it back to them as global prices surge?

Santos is not the only local energy giant making a splash among the oil giants.

Woodside Petroleum boss Meg O’Neill was part of the Trump entourage on his recent trip through the Middle East. She signed up Saudi Aramco, the world’s largest oil and gas producer, as a partner for Woodside’s US projects.

She was almost the only female in a group photo with Trump and Saudi Crown Prince Mohammed bin Salman. She was quoted in the official White House press release.

“Woodside and Aramco will explore global opportunities, including Aramco’s potential acquisition of an equity interest in an LNG offtake from the Louisiana LNG project as well as exploring opportunities for a potential collaboration in lower-carbon ammonia,” she said.

“Lower-carbon” is the other major reason why these petro states are now pouring more money into LNG developments than oil.

Even the petro states realise LNG will have a longer shelf life than oil as the alleged “transition fuel” to a green energy future.

China’s total crude oil consumption dropped last year and developing nations are expected to follow as they adopt the flood of cheap EVs China is churning out.

But the future of the Santos bid is as uncertain as the outcome of the Israel/Iran conflict.

The XRG consortium is conducting due diligence, and as both sides are cautioning, there is no certainty that a formal offer will emerge.

More importantly, there are many regulatory hurdles, including government approval if a concrete offer does emerge for what is a critical piece of Australian infrastructure.

The issue of domestic gas reservation, to prevent taxpayers and local businesses from getting screwed by companies supplying Australia its own gas, will be an interesting part of any takeover negotiations, especially since Santos already supplies gas domestically.

The fact that Santos is trading at something close to a $5 billion discount to the $30 billion cash being offered for its shares tells you plenty about how cautious the market is about the potential success of this deal.

As Treasurer Jim Chalmers told the ABC: “There are still a number of steps that need to happen before it becomes a transaction. I will listen very closely, if it comes to it, to the advice of the Foreign Investment Review Board but I won’t pre‑empt that advice.”

The Business Briefing newsletter delivers major stories, exclusive coverage and expert opinion. Sign up to get it every weekday morning.