Santos’ selldown of Alaska Pikka asset unlikely before 2025

Santos will unlikely sell down its holding in its Pikka asset in Alaska before 2025 as the oil and gas company has to first prove the viability of the project.

The deal will fuel the coffers of Santos, but Citi said it does not expect the selldown to be imminent.

“We think Santos will need to de-risk capex further, particularly to demonstrate the capabilities to drill in the Arctic, before being able to open the data room in a formal sales process,” Citi said. “We think Santos could farm down closer to first oil, perhaps in late 2025.”

Santos last year approved the $3.7bn Pikka project in Alaska, which is expected to produce 400 million barrels of oil that chief executive Kevin Gallagher said would buoy the fortunes of shareholders amid a global energy crunch.

“We look forward to working with our partners on the North Slope and continuing to build strong relationships together as we continue to develop and optimise our Alaskan business,” said Mr Gallagher.

The Pikka project, 49 per cent owned by Spanish energy major Repsol, is expected to yield a return of about 19 per cent based on $US60 a barrel long-term oil prices. Production is expected to start in 2026, at 80,000 barrels a day of oil, with Santos committing the project will be net zero direct emissions for its share, thanks to agreements with Alaska Native Corporations to deliver carbon offset projects.

“The timing would allow smaller companies without as much balance sheet capacity to better fund the purchase price,” said Citi.

The project is expected to be operational by 2026, but it has placed Santos in the crosshairs of green groups, which have accused the company of thumbing its nose to reducing emissions despite the oil and gas giant pledging net zero direct emissions by 2040.

The selldown is not unexpected. Santos took over a 51 per cent stake in Pikka through its merger with Oil Search in December 2021, and was expected to sell at least part – if not all – of the project, which is well outside its geographical focus in Australia and PNG.

Citi expects Santos will prefer to keep a stake in the project, and it expects Pikka to be a much-needed source of growth.

Santos in July posted an 18 per cent drop in quarterly sales as the global energy crunch abates, and it is struggling to meet its production target from its $5.3bn Barossa gas project in the Timor Sea.

Work on the project has been suspended since 2022 after the Federal Court found the oil giant failed to consult local Indigenous people adequately on the development.

Mr Gallagher said in July that the company has submitted its new environmental plan for the project, and if it can resume drilling by the end of 2023 it can meet its first production target of 2025 without any delays and cost blowouts. Santos said the Barossa project was two-thirds complete.

But the company can‘t continue drilling until it has regulatory permission, denting its ambitious plans to pipe gas 300km from the Barossa field to an export plant in Darwin. Santos can ill-afford any delays as it struggles with its Dorado oil and gas project in WA.

Santos earlier this year said it would incur $US328m in writedowns after cutting the amount of oil and gas reserves estimated in fields off WA and other late-life ventures.

Santos is also believed to be working on a bid to sell down its 80 per cent share of the Dorado project.

Santos’ partner in Dorado, Carnarvon Energy recently sold 10 per cent of the project to Taiwan’s national oil and gas company CPC Corporation. The deal that included rights to the Pavo field among others had an applied value of about $US1.5bn.