Narrabri deal touted as Santos deadline set for XRG takeover

The starting gun has been fired on Abu Dhabi’s $30bn Santos takeover with Beach mooted as a possible buyer of the stalled Narrabri gas project.

Santos CEO Kevin Gallagher at the Moomba carbon capture and storage plant in South Australia.

A deal to offload Santos’ undeveloped Narrabri gas field to the Kerry Stokes-backed Beach Energy could materialise to soothe regulatory concerns as Abu Dhabi’s XRG consortium pitches its $30bn takeover to South Australia this week.

Regulators may push for a divestment of the Narrabri project, which could supply half of NSW’s gas needs, as part of a possible trade-off pursued by regulators during buyout negotiations, according to broker Citi.

Snapping up Narrabri would help boost Beach’s short reserve life and alleviate broader concerns over shortages looming in the east coast gas market later this decade with a final investment decision potentially earlier than Santos can manage in the 2027 financial year.

The precedent set by Brookfield and EIG’s ultimately foiled takeover approval for Origin Energy suggests conditional approvals can be structured to balance national interest, Citi said.

“The regulatory review process presents a national interest test. On one hand, a foreign-controlled consortium acquiring critical domestic gas assets, such as gas plants on both the east and west coast and major hubs including Cooper Basin, could pose energy security concerns,” Citi analyst Tom Wallington said.

ADNOC boss Sultan al-Jaber. Picture: CHRISTOPHER PIKE/BLOOMBERG NEWS

“On the other, attaching the right conditions to the deal could accelerate development of these under-utilised or untapped assets and bring forward domestic supply that might otherwise remain stranded.”

While the deep pockets of ADNOC would provide the financial firepower needed to progress the Narrabri development, MST Financial energy analyst Saul Kavonic has also said it could be used as a bargaining chip to win over the Foreign Investment Review Board.

ADNOC’s XRG consortium was handed an exclusive four week period of due diligence on Friday for the finely poised takeover, after which potential rival suitors can be entertained should any superior offers emerge.

The Middle East consortium met government officials in Canberra last week and has travelled to Adelaide, the headquarters of Santos, for further meetings with its target on Monday and ahead of an extensive tour of its sprawling oil and gas empire. It signed a process and exclusivity deed on Friday as part of expected deal negotiations.

The indicative offer of $US5.76 ($8.89) a share represents a 28 per cent premium to the company’s last closing price before the announcement, and has won the Santos board’s approval to advance to exclusive due diligence.

However, shares have been trading at a discount to the bid price, closing at $7.66 on Friday.

The gap is seen as a sign of investor caution that FIRB and the federal government may ultimately baulk at handing control of the country’s second-largest independent gas producer to a foreign consortium, including a state-owned oil major from the Middle East.

Some in the market expect ADNOC will dangle a commitment to fast-track the development of the Narrabri gas project, long touted as a potential gamechanger for east coast supply, to bolster the national interest case for the takeover.

The Narrabri gas field contains an estimated 1500 petajoules of gas, with potential daily production of 200 terajoules — equivalent to half of NSW’s current consumption. But the project, while technically greenlit at the federal level, remains politically fraught, with persistent community opposition and environmental challenges still unresolved.

Adding to complexities for ADNOC is a Commonwealth review of three major policies that regulate the east coast gas market which has left the door open to unspecified government “initiatives” to boost domestic supply.

Citi said the takeover had landed amid a backdrop of a structurally tight gas market.

“Domestic gas prices have risen four times since 2011... driven by falling Bass Strait output and seasonal pipeline bottlenecks,” Citi said.

“As demand grows and winter constraints persist, there is increasing need for new upstream investment, firming capacity, and infrastructure to restore the supply and balance.”

Santos chief executive Kevin Gallagher in May launched a blistering critique of Victoria’s energy policy, likening the state’s attitude towards investment to that of North Korea and warning that the state’s approach is indicative in why major projects are going offshore.