Australia: GLNG Signs Binding LNG Off-Take Agreement with KOGAS for 3.5 Mtpa

Santos Limited  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 years. 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 years, 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.

Reserves

GLNG has internally estimated that its dedicated 2P CSG sales gas reserves will be 5,005 PJ as at December 2010. The project has continued its track record of reserves build in 2010, adding over 1,000 PJ of 2P reserves in the GLNG dedicated areas since December 2009.

GLNG reserves and resources have been independently certified by Netherland, Sewell & Associates, Inc. (NSAI). NSAI as at 31 October 2010, estimates 2P reserves of 5,377 PJ (excluding dedicated Santos portfolio gas supply), which is 372 PJ higher than GLNG’s internal estimate of 5,005 PJ. Additionally, NSAI estimates that the ultimate potential 2P reserves maturation in the GLNG dedicated areas is 9,848 PJ.

Capital expenditure

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 US$16 billion capital expenditure estimate includes approximately US$2 billion in contingencies.

The capital expenditure estimate is underpinned by fixed lump sum turnkey EPC contracts from preferred contractors Bechtel for the two LNG trains and Saipem for the gas transmission pipeline, and an EPC contract for the upstream surface facilities with preferred contractor Fluor.

The predominantly fixed price EPC contracting strategy, world-class contractors and material project contingencies are intended to mitigate exposure to capital expenditure risk. Santos anticipates its overall internal rate of return from GLNG to be in the range of 11% to 14% (in US dollar terms) based on the current contracted off-take of 7 mtpa.

Funding

Santos’ 30% share of capital expenditure for GLNG is US$4.8 billion. To support the development of the GLNG project, Santos has strengthened its balance sheet and funding capacity ahead of the FID.

The equity raising announced today is the final step in fully funding the equity required for Santos to fund its share of GLNG while also providing for financial flexibility to deliver on other existing projects and maintain an investment grade credit rating during the construction of GLNG and PNG LNG. The equity raising is sized to maintain financial metrics consistent with a BBB+ credit rating.

The expected funding for Santos’ share of the GLNG project will be sourced from:

– Existing cash – Santos has approximately A$3.9 billion in cash.

– Sale of an additional 15% stake in GLNG to KOGAS and Total for A$665 million announced today.

– The A$500 million fully underwritten institutional placement announced today.

– Operating cash flow from the base business which, at analyst consensus oil prices, is expected to materially exceed base business capital expenditure through the period to 2015.

– Undrawn bank facilities – Santos has approximately A$2 billion of undrawn bank lines which have an average maturity of five years (not including the committed PNG LNG project facility).

– Additional senior debt, potentially including bond and Export Credit Agency backed finance.

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).

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Source: Santos, December 17, 2010;