Santos’ Narrabri project is ADNOC’s trump card but east coast review shapes as potential spoiler

Shares in Santos are trading well below the bid price indicating concern Australia could reject the bid. Narrabri is ADNOC’s trump card.

Santos chief executive Kevin Gallagher. Picture: Brenton Edwards

A promise to develop Santos’ Narrabri gas project for the domestic market could be the key piece of leverage that the Abu Dhabi consortium holds in overcoming political resistance to the $30bn takeover.

Santos on Monday confirmed it had received a non-binding cash offer from a consortium led by ADNOC, along with Abu Dhabi’s sovereign wealth vehicle ADQ and US private equity firm Carlyle. 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.

Yet despite the headline valuation, shares in Santos continue to trade at a material discount to the bid price — a sign of investor caution that the Foreign Investment Review Board (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.

Industry sources say that ADNOC will dangle a commitment to fast-track the development of the Narrabri gas project in northern NSW, long touted as a potential gamechanger for east coast supply, to bolster the national interest case for the takeover.

UBS energy analyst Tom Allen said the Santos transaction was in an attractive position.

“Santos is sitting on undeveloped resources, which could be meaningful and important for long-term domestic gas on the east coast,” said Mr Allen.

“Narrabri has all the federal environmental approvals and that could be something that a consortium would look to leverage in order to gain regulatory support.”

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.

And even as the government grapples with how to balance the imperative of shoring up future gas supplies with rising political pressure over fossil fuel projects, it is undertaking a broader regulatory overhaul of the east coast gas market that could complicate the consortium’s prospects.

That review, launched by the Albanese government earlier this year, is expected to examine the long-term structure of the east coast gas market and the future of emergency interventions such as the $12 per gigajoule domestic price cap — a temporary measure introduced in the wake of last year’s energy crisis. While the cap was framed as a consumer protection mechanism, energy producers have warned it has chilled investment in new supply.

Santos is directly exposed to any changes in how domestic gas is regulated. The company purchases gas from the local market to help meet its export obligations from the GLNG facility in Queensland. That model, critics say, adds strain to domestic supply and could face sharper scrutiny under the government’s review.

Although the regulatory process is still in its early stages, some people in the energy industry have drawn comparisons with last year’s failed Brookfield bid for Origin Energy. In that case, government interventions, including a $125 per tonne cap on coal, directly impacted the economics of the bid, ultimately contributing to the breakdown of the transaction. It was ultimately defeated by the will of shareholder AustralianSuper.

Treasurer Jim Chalmers has so far given little away about his thinking on the ADNOC-led bid, though his comments this week offered a reminder that FIRB’s national interest test will be decisive.

“It’s a big transaction in a sensitive area,” Dr Chalmers told Sky News. “We’ve made it clear over a long period of time that considerations of economic security and national security are very closely intertwined.”

While Santos has been a long-time advocate of new supply projects such as Narrabri, the offer from ADNOC may enable the project to move forward more quickly. For its part, ADNOC has been looking to expand its international presence as part of a broader energy transition strategy, eyeing both hydrocarbons and cleaner fuels.

Even if the consortium clears the regulatory and political hurdles, it will still need to win over Santos shareholders, many of whom remain on the sidelines.

Among them is Australia’s sovereign wealth manager, the Future Fund, which holds a significant stake in the company. Chair Greg Combet declined to offer a position on the transaction when asked on Monday.

“It’s early days for me to be making observations about it,” Mr Combet said. “We will see how this process unfolds and will be thinking about it as an equity participant along the way. But I wouldn’t want to prejudge anything.”

Asked whether he believed the takeover was in the national interest, Mr Combet was cautious: “It’s not appropriate for me to be talking about that. We have external investment managers talking to us and giving us advice.”