Santos revs up its PNG gas project sales pitch

PNG LNG Project export jetty located outside Port Moresby.

The $27bn energy group Santos is about to fire the starting gun on a sale process for a stake in the PNG liquefied natural gas project, according to sources.

But the challenge for Santos will be drumming up competitive tension in the auction, given that Total is favourite to buy the asset.

One way Santos could do this is by paying the bidding costs of other parties, although the thinking is that going up against global heavyweight Total could be a brave move for any suitor.

Total is the operator of the other major PNG project, Papua LNG, which is linked to PNG LNG. In PNG LNG, ExxonMobil owns 32.2 per cent, the PNG government 16.2 per cent and Santos now has Oil Search’s interest of 29 per cent, taking its overall holding to 42.5 per cent.

Other parties, including landowners and JXTG Nippon Oil and Energy, own the rest.

Gaining exposure to the PNG LNG project would create synergies for Total.

The owners of Paupa LNG include Total with 40.1 per cent, ExxonMobil with 36.5 per cent and Santos on 22.8 per cent.

The remainder is held by minority parties.

It is thought that ExxonMobil would not be keen for a new group to come into PNG LNG, and an acquisition by Total would be in its interest, given it is its partner on Papua LNG.

Should another party win an action to buy the Santos interest in PNG LNG, ExxonMobil may exercise its pre-emptive rights.

So far, the widely held expectation is that a stake of about 10 per cent or 15 per cent of PNG LNG would be on offer by Santos, which is the minimum a buyer can obtain to secure voting rights.

PNG LNG Project export jetty located outside Port Moresby.

Morgan Stanley analysts had earlier said they expected Santos would reap about $US2.3bn ($3.25bn) for a 10 per cent interest, based on it selling for a 25 per cent discount to valuation. But this was before the oil price soared as Russia launched its invasion of Ukraine. The price of Brent crude has soared to $US107.89 a barrel from about $US77 in November last year.

Santos is moving on asset sales following its $21bn merger with Oil Search, with advisory firm Moelis hired to sell Oil Search’s 51 per cent stake in the Alaskan project Pikka.

Santos told the market while reporting its results in February that it had increased capital spending in 2022 due to its larger PNG LNG interest.

PNG LNG had 8.4m tonnes of LNG and 110 cargoes loaded during 2021, and its earnings margin improved 84 per cent.

Its unit production costs were $4.90 barrel of oil equivalent and its cashflow is expected to increase around 2026 once project finance is repaid.

Also expected to be sold through Goldman Sachs is part or all of its 80 per cent interest in the Doraldo project in Western Australia, although this will be after the final investment decision towards the end of this year.

Pikka and Doraldo both have large capital costs.