Here are some of the things that might be worth thinking about...

Here are some of the things that might be worth thinking about in relation to the proposed ESG-Santos merger:

- INSTANT RESERVES UPGRADE (for Santos). ESG and PEL 238 has a large market constrained 2C figure, and Santos has the GLNG project in QLD. Remember DC saying how 'the Majors ARE the market'. Well consider what happens when a 'Major', with a known market, merges with a market constrained gas resource. There is a large reserves upgrade available. The majors, by virtue of their access to markets, can commercialise and upgrade resources to reserves simply by buying them.

GAS ACQUIRED AT ONE END, BUYERS LINED UP AT THE OTHER - there is no way that Santos can sell equity or offtakes for a 3rd Train without extra gas. What buyer would sign up for gas offtakes when GLNG has only half the 2P of the first 2 trains? So clearly, in order to proceed to a 3rd Train, Santos would have to secure the buyers at one end, and the gas at the other. Probably at the same time. Remember how we were wondering why the Japanese seemed unconcerned about a potential change of control? It is probably because Santos has been involved in the ESG-Japanese negotiations for some time.

Post-merger, expect Santos to announce equity/offtakes with Marubeni (and others) for a 3rd train out of Gladstone. Gas in at one end, buyers lined up at the other.

ONE OWNER FOR ALL OF PEL 238 - it makes a lot more sense, and creates more collective value, for one party to own and operate all of the resource. Yes, I would love another party to come over the top and outbid Santos for the controlling 65%. Santos would then probably have to sell their minority share. But in the absence of that happening, it makes sense for the whole field to be owned by one party.

SHALE IN THE COOPER BASIN - Even though there are no 2P shale reserves in Australia at the moment, in a higher priced gas environment (LNG and Carbon Tax), shale becomes economic. Remember BPT's recent shale results. The impact of these results are not confined just to BPT. How much of Santos' shale is also ready to be upgraded? We will find out, probably in a matter of months after the proposed merger (if it does goes through).

SANTOS AS A TAKEOVER TARGET - Ever since the SA Government removed the cap on Santos' ownership, Santos has been talked about as a takeover target in its own right. Santos is of the size that is very attractive to the supermajors. Whether that be Shell, or BG (who, remember, previously has a tilt at ORG), or a new market CSG entrant such as BHP. It is entirely possible that ESG and Santos know of a suitor for the whole merged Santos-ESG package. Again, there is likely value beyond the 90 cents...


It all comes down to reserves, and price, and what recognotion of future value can be negotiated into ESG price. The IER will answer the reserves question. But if it turns out that ESG has not been able to lift their 3P much at all, can we expect much more than $0.50 per GJ of 2P? Maybe not

The disappointing bit from my perspective is not the metric, but that the commercial progress has been seemingly so limited. The reserves are the problem, not the price for those reserves. Prove up bigger reserves, you get more money.

So, whilst many of us (understandably) are dissapointed and angry, consider whether you are angry about the metric, or angry about the lack of reserves progress and the poor communication...

Yaq