What Jim Chalmers will be thinking in his first major FIRB decision as Treasurer

The doubt surrounding Chalmers’ decision to approve or knock back the Santos takeover is creating a $3.6bn discount. Here’s why.

Federal Treasurer Jim Chalmers. Picture: NewsWire / Martin Ollman

Jim Chalmers’ political leverage and tighter foreign investment rules have created a $3.6bn discount on the Middle Eastern bid for listed gas company Santos.

The target is trading 12 per cent lower than its $8.89 per share offer from Abu Dhabi National Oil Company subsidiary XRG, mostly because investors don’t expect the $30bn bid to be approved.

Chalmers said this week that the national economic interest is the “primary lens” in his first major FIRB decision as Treasurer.

The first consideration is that of the political: XRG could hold back the development of Australian resources to prevent extra supply coming to market with the objective of supporting energy prices.

Former treasurer Joe Hockey experienced a similar situation when in 2014 the iron ore price fell, risking Fortescue Metals and jobs, because, as he says in his book, “There were ways to manipulate the price and the Chinese were pulling every lever.”

Hockey leveraged the prospect of a BHP and Rio Tinto merger threatening China’s then Minister of Finance Lou Jiwei with the idea that China would end up dealing with just one giant supplier out of Australia and far less bargaining power.

The Chinese minister’s “eyes widened,” and the manipulation of the iron ore price abated.

Dr Chalmers will no doubt consider what leverage he might be able to obtain out of this, especially given Santos and Woodside were looking at a potential merger last year.

XRG made statements this week promising that it was its “intent” to “strengthen Santos’ role in supporting secure, reliable and affordable energy for Australia.”

Energy analyst Saul Kavonic said that given the east coast gas dynamics, where Santos’ GLNG is viewed as a villain in some quarters, Dr Chalmers “risks politically owning any future east coast gas crises if he waves the deal through”.

As Kavonic says, Australia has experienced plenty of foreign investors who have come to invest in Australian LNG only to end up “standing on the hose of investment”.

XRG is controlled by the United Arab Emirates.

“While UAE investment will not be seen as sensitive as Chinese investment, the UAE is not a values aligned democracy either,” Kavonic says.

Santos GLNG at Curtis Island.

Chalmers’ second consideration is the advice from the Foreign Investment Review Board.

“I will listen to the advice of the FIRB,” he has said firmly.

FIRB has become far stricter in its assessments of foreign investment since January 2021, when Australia’s Foreign Investment Framework’s national security powers were strengthened.

K&L Gates partner Carl Hinze, who has acted for foreign institutional investors on their FIRB applications from around the world including China, has never had an application rejected, but says the new framework is far tougher.

“The comparisons made to then Treasurer Peter Costello’s refusal to approve Shell’s bid for Woodside in 2000 is important because in many ways, FIRB’s approach to administering Australia’s foreign investment regulatory regime has strengthened since 2000, especially in the past ten years,” Hinze says.

The FIRB’s most recent report notes that of 377 commercial foreign investment proposals approved in its last assessable quarter of 2024, 23 related to national security actions that would not have been captured prior to the 2021 changes.

“More than ever, FIRB and the Treasurer are taking a risk-based approach in administering the FIRB legal and regulatory framework,” Hinze says.

“While FIRB is streamlining consultation and assessment of non-sensitive lower risk foreign investment proposals, there is definitely more rigorous assessment of higher risk investment proposals. XRG’s Santos bid fits squarely in this category.”