a gsa with santos?, page-18

It is highly unlikely that Santos will enter a GSA with ESG for a myriad of reasons.

Any possible GSA would most likely be between ESG and the GLNG Joint Venture.

Reasons why they wouldn't enter a GSA:

If GLNG enters a GSA, ESG share price is re-rated recognising full value of ESG's gas reserves by earmarking the gas for higher margin LNG production as opposed to domestic market supply. This potentially doubles ESG's share price and acquisition cost assuming GLNG will want to eventually control the assets in the future.

GLNG partners would forfeit potential upstream profit from gas sales by not acquiring ESG. (Not a problem for STO with 20% share equity and 30% of the net income from gas sales)

Increased cost of LNG production (ESG margin)

Supply/control risk - increased project risk associated with reliance on third party gas delivery

Management risk - misalignment of GLNG and ESG management objectives. ESG?s management would potentially be distracted/stretched by pursuit of higher margin business such as LNGN and not fully focused on delivery of gas to GLNG

Other factors to note:

GLNG is a JV. It is not capital constrained. In the event JV partners takeover ESG in proportion to their GLNG equity, Santos will not have to kick much in with 20% equity and 30% share of tenements

GLNG is planning for up to 5 trains

Assuming GLNG needs ESG's gas, it is more likely Santos and the GLNG joint venturers will take-over ESG at some stage. They should go now while the gas is technically stranded in the domestic market. In saying that, there's no reason why they can't bide their time and takeover ESG at a later stage. But while ESG's off the leash, there's a risk they'll pay a significantly higher price for control in the future.

It will cost the GLNG JV a lot less now than it would if ESG manages to secure sales into the LNG export market.

Finally a GSA with GLNG or Santos would be great for ESG and the shareholders.