Santos snaps up ConocoPhillips LNG assets for $2bn

Santos ConocoPhillips LNG assets oil gas energy Darwin Bayu-Undan Barossa Wickham Port
Santos’ $2.05 billion acquisition of ConocoPhillips’ northern Australia assets is expected to advance a final investment decision for the development of the Barossa gas field.

Australian gas major Santos (ASX: STO) has inked a US$1.39 billion (A$2.05 billion) deal to buy the northern Australian oil and gas assets of global energy giant, ConocoPhillips.

Santos said the deal, announced to the market today, is expected to lift the company’s earnings per share by about 16% and boost its output by about 25%.

It will also bring the Adelaide-based gas player closer to its goal of being a leading regional liquefied natural gas (LNG) supplier, according to Santos chief executive officer Kevin Gallagher.

This is the second major acquisition Santos has made in less than 12 months, following its purchase of Western Australian gas producer Quadrant Energy last November.

This latest transaction comprises ConocoPhillips’ 56.9% stake in the Darwin LNG plant at Wickham Point in the Northern Territory, as well as the offshore Bayu-Undan gas field that feeds it.

The deal also includes ConocoPhillips’ 37.5% stake in the offshore Barossa project, a 40% interest in the Poseidon field and a 50% share in the Athena field.

Santos is expected to fund the entire acquisition out of cash and new debt.

Mr Gallagher said the company has a long-established relationship with ConocoPhillips, which has operated its northern Australian natural gas assets for many years.

The two companies were founding partners in Darwin LNG, which began operating in 2006, with Santos currently holding 11.5% stakes in both the Darwin plant and the Bayu-Undan field.

Barossa: the main prize

Mr Gallagher told reporters on a conference call that the “big prize” in the deal was Santos’ opportunity to push forward with development of Barossa as the next field to backfill the Darwin LNG plant.

The Bayu-Undan gas field that currently feeds the plant is expected to run dry by the end of 2022, meaning replacements would be required to keep the plant open.

Barossa is the lead candidate with Santos wanting to develop the field using subsea wells tied back to a floating production storage and offloading facility for gas processing and condensate export.

A 260km gas export pipeline will then transport the gas to the existing Bayu-Undan pipeline, which links to Darwin LNG.

Barossa Darwin gas lng Santos ConocoPhillips
The Barossa project is a gas and light condensate field located offshore about 300km north of Darwin, Northern Territory.

The development of Barossa is expected to extend the operating life of Darwin LNG by more than 20 years.

As part of the deal, Santos has agreed to pay ConocoPhillips an additional US$75 million (A$110 million) if a final investment decision is reached on developing the Barossa field.  This is expected by early 2020, with first LNG anticipated in 2024.

“This acquisition delivers operatorship and control of strategic LNG infrastructure at Darwin, with approvals in place supporting expansion to 10Mtpa and the low-cost, long-life Barossa gas project,” Mr Gallagher said.

Darwin stake sale

Following the acquisition, Santos’ stake in Darwin LNG and Bayu-Undan will be 68.4% and 62.5%, respectively.

In today’s announcement, Santos also said it planned to sell down its equity to target ownership of between 40-50% to “achieve increased partner alignment”.

“Santos intends to manage gearing within our stated operating range and is targeting to sell-down equity in Darwin LNG and Barossa to 40-50% in order to create alignment between joint venture participants, as well as by optimising equity levels in our Western Australia assets,” Mr Gallagher said.

He said the company was in talks with existing Darwin LNG joint venture partners, which include Japan’s Inpex, Italian gas major Eni, Japan’s JERA and Tokyo Gas, to sell the Barossa and Darwin LNG equity, as well as with LNG buyers for offtake volumes.

“Santos will target the contracting of about 60-80% of LNG volumes for 10-plus years prior to taking FID on Barossa, which is expected by early 2020,” Mr Gallagher added.

According to the company, discussions to date have demonstrated strong interest in Barossa LNG, given it is a brownfield upstream development located close to north Asian demand.

ConocoPhillips to exit northern Australia

This deal with Santos will see ConocoPhillips, considered the world’s largest independent exploration and production company, exit all of its northern Australian operations including the Darwin LNG plant and offshore gas fields.

However, it will be holding onto its 37.5% stake in the Australia Pacific LNG project near Gladstone in Queensland, which it owns in a consortium with Origin Energy (ASX: ORG) and China’s Sinopec.

The Texas-headquartered company has recently been focused on shale assets in the US and has a large acreage position in the onshore Anadarko and Permian Basins.

It also holds assets in the offshore Gulf of Mexico and major ownership interests in two of the US’ largest oilfields – Kuparuk and Prudhoe Bay on Alaska’s North Slope.

In addition, the company has oil sands operations in Canada, as well as offshore assets around Norway and the UK.

In a separate statement on Monday, ConocoPhillips executive vice president and chief operating officer Matt Fox said the company was pleased that Santos recognises the value of the existing northern Australian business and the “opportunity to develop Barossa and thereby, continue Darwin LNG’s operations for another 20-plus years”.

“While we believe the Darwin LNG backfill project remains among the lower cost of supply options for new global LNG supply, this transaction allows us to allocate capital to other projects that we believe will generate the highest long-term value to ConocoPhillips,” he said.

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