New deals boost Gladstone LNG

Oil and gas producer Santos has announced the sale of a 15 per cent interest in the Gladstone LNG project, along with a gas sales deal to Korea Gas, paving the way for a final investment decision on the $16 billion project in January.

The 15 per cent interest, worth $A655 million, was sold to Korea Gas (KOGAS) and French company Total (7.5 per cent each).

Santos also announced today a $500 million capital raising to fully fund it's stake in GLNG, through the placement of almost 40 million shares at $12.55 each.

Rumours of a deal swirled this morning after the Korean Government gave it the green light, and Santos shares were up almost 3 per cent in morning trade before a trading halt was called.

The ownership structure of the Queenland gas development now stands at Santos 30 per cent, Petronas 27.5 per cent, KOGAS 7.5 per cent and Total 7.5 per cent.

Under the off-take agreement, KOGAS has agreed to purchase 3.5 million tones per annum of LNG from the project.

The amount of gas now sold under binding off-take agreements is now 7mt pa, worth an estimated $120 million, accoridng to Santos.

Santos' deal with KOGAS comes just weeks after a rival Gladstone LNG consortium, headed by Britain's BG Group, approved the first of at least four major coal seam gas-fed LNG projects worth ove $60 billion expected to be developed at Gladstone over the next five years.

BG's $15 billion Curtis Island plant will produce 8.5 million tonnes of LNG annually from 2014. Separately, Shell and Petrochina are also planning their own LNG project at Gladstone, as is a consortium comprising Origin Energy and US group ConocoPhillips.

The boom in Queensland LNG proposals, the first in the world to use gas extracted from underground coal seams, could potentially see the state challenge Western Australia for the mantle of Australia's main LNG producer.

Currently, WA accounts for 90 per cent of the nation's LNG exports, and boasts developments either underway or planned worth over $150 billion. WA's list of projects includes the $43 billion Gorgon project now under construction, the $14 billion Pluto development due for completion next year, and the giant Browse and Wheatstone projects jointly worth $60 billion.

Santos also announced today it would be reducing its dividends in order to fund its share of the Gladstone and PNG LNG projects.

Ratings agency Standard & Poor's reacted to the news by placing Santos' 'BBB+' long-term and 'A-2' short-term corporate credit and debt ratings on CreditWatch with negative implications.

"We consider the GLNG development as significantly transformational for the underlying business and financial profiles for Santos," Standard & Poor's credit analyst May Zhong said.

"This transformation reflects, in our view, not only the relative size of the GLNG development relative to Santos' existing base business but also the level of complexity in designing, constructing, contracting, commissioning, resource conversion, and integrated logistical management required of up to five years for the development.

"We view this period during which the GLNG construction phase coincides with the company's PNG-LNG construction as being the years in which Santos is most vulnerable to adverse economic conditions, in particular exposure to volatilities in oil prices."

Extracts from Santos' announcement are pasted below:

Santos Limited (Santos, ASX:STO) today executed binding agreements with KOGAS and Total which pave the way for a final investment decision (FID) in January 2011 on the two train GLNG project.

GLNG has an estimated gross capital cost of approximately US$16 billion from FID until the end of 2015, when the second train is expected to be ready for start-up.

The agreements signed today provide for:
- The sale by GLNG of 3.5 million tonnes per annum (mtpa) of LNG to KOGAS;
- The sale by Santos of an aggregate 15% interest in GLNG to Total and KOGAS for
A$665 million; and
- An aligned GLNG joint venture comprising Santos, PETRONAS, Total and KOGAS.

Upon completion of the KOGAS and Total sale transactions, the ownership structure of GLNG will be: Santos 30%; PETRONAS 27.5%; Total 27.5%; KOGAS 15%.

The GLNG partners have satisfied KOGAS's 3.5 mtpa LNG off-take requirement by exercising their option over the 1.5 mtpa previously committed to Total.

With 7 mtpa of GLNG off-take contracted to KOGAS and PETRONAS, the GLNG partners will
recommend to their respective Boards FID on the two train project by the end of January 2011.

Equity raising to fully fund GLNG

Santos today also announced a fully underwritten institutional placement to raise approximately
A$500 million to complete the funding of its 30% equity contribution for the two-train GLNG project.

Santos will issue approximately 39.8 million ordinary shares at a placement price of A$12.55 per
placement share, which represents a 2.4% discount to yesterday's volume weighted average price (VWAP) and a 1.2% discount to the 5-day VWAP. The placement shares will rank equally with existing shares on issue and will qualify for Santos' final dividend for the financial year ending 31 December 2010.

Santos shares are expected to recommence trading on 20 December 2010. Settlement of the
Institutional Placement is scheduled to take place on 23 December 2010, with allotment and
commencement of trading of placement shares expected to occur on 24 December 2010.

KOGAS binding Heads of Agreement for 3.5 mtpa of LNG

GLNG has today signed a binding heads of agreement for the sale of 3.5 mtpa of LNG to KOGAS, the world's largest buyer of LNG.

The agreement provides for 1.7 mtpa of the KOGAS contracted volumes to be delivered from GLNG train 1 and 1.8 mtpa from train 2 for a period of 20 years1. The agreement is binding and subject only to the GLNG project reaching FID.

KOGAS has received all necessary Korean Government approvals for the LNG off-take agreement.

In conjunction with the agreement with KOGAS, 1.8 mtpa of PETRONAS' 3.5 mtpa of committed offtake will be delivered from GLNG train 1 and 1.7 mtpa from train 2. The PETRONAS agreement will also remain in place for a 20-year term. The agreement is binding and subject only to the GLNG project reaching FID.

In combination, the KOGAS and PETRONAS binding agreements now provide for the sale by GLNG of 7 mtpa of LNG in aggregate for 20 years1, underpinning the development of a two-train project. The combined value of the GLNG off-take agreements is estimated to exceed US$120 billion at market consensus oil prices.

Santos Chief Executive Officer David Knox described the off-take agreement with KOGAS as a
landmark agreement for the Australian LNG industry.

"We are pleased to welcome KOGAS, the world's largest buyer of LNG, as a fully integrated joint
venture partner into the GLNG project. Santos has brought together three of the world's leading LNG operators to partner with us in GLNG."

"Notably this agreement represents the first purchase of LNG from coal seam gas by KOGAS. It is another robust endorsement of the quality of the GLNG project. We look forward to continuing to develop our relationship with KOGAS both in its capacity as a customer of, and a partner in, GLNG."

"With 7 mtpa of LNG off-take now secured by binding agreements, GLNG is well and truly ready to go and the partners are working through the logistics for a final investment decision to be taken before the end of January," Mr Knox said.

The terms of the previously announced LNG off-take heads of agreement with Total provided GLNG with the option to terminate the agreement upon the signing of an off-take contract between GLNG and another LNG buyer. Accordingly, as a result of the sale of 3.5 mtpa to KOGAS announced today, the agreement for the sale of 1.5 mtpa of LNG off-take to Total will be cancelled.

Sale of 7.5% interest in GLNG to KOGAS and 7.5% interest in GLNG to Total

Santos has today also entered into separate agreements for the sale of 7.5% interests in GLNG to each of KOGAS and Total, for aggregate proceeds of A$665 million.

In parallel, PETRONAS has also entered into an agreement to sell a 7.5% interest in GLNG to
KOGAS. The equity sale agreements are binding and subject only to Australian Foreign Investment Review Board approval and other customary consents and regulatory approvals.
Upon completion of the KOGAS and Total sale transactions, the ownership structure of GLNG will be: Santos 30%; PETRONAS 27.5%; Total 27.5%; KOGAS 15%.

GLNG project update

The GLNG project includes the development of coal seam gas resources (CSG) in the Bowen and Surat Basins in south-east Queensland, construction of a 420-kilometre gas transmission pipeline from the gas fields to Gladstone, and two LNG processing trains with a combined nameplate capacity of 7.8 million tonnes per annum (mtpa).

First LNG exports are expected to commence in 2015, generating about US$6 billion in average gross revenue per annum at a market consensus oil price for the 7 mtpa off-take.

Dividend policy

Given the transformational nature of the company's LNG portfolio, including GLNG and PNG LNG,
Santos expects to reduce its dividends in order to strike an appropriate balance between funding its suite of growth projects and continuing to pay a meaningful dividend to shareholders.

Consistent with this revised dividend policy, the final dividend for the year ended 31 December 2010 is expected to be 15 cents per share. The final dividend is expected to be considered and declared by the Santos Board in February 2011. New shares issued in the equity raising will qualify for the 2010 final dividend.

Santos also expects to reduce the annual dividend to 30 cents per share (on the expanded capital base following the equity raising) for the year ending 31 December 2011. In parallel, Santos will introduce a 2.5% discount on the Dividend Reinvestment Plan (DRP).