Santos' decision to acquire Quadrant Energy for USD2.15bn will significantly bolster its upstream position in Australia, in line with its strategy to priortise growth at home.
The deal expands Santos' growth options in the domestic LNG space, where cost-competitive brownfield expansions are increasingly being preferred by major producers to spearhead the next wave of LNG exports growth, at the expense of higher-cost greenfields.
However, Santos' immediate focus will continue to be its projects in eastern Australia, where it is seeking to materially boost production and increase gas supply to both its Gladstone LNG project and gas-hungry markets in the east coast.
Santos' decision to acquire Quadrant Energy for USD2.15bn will significantly bolster its upstream position in Australia, in line with its strategy to priortise growth at home. Santos is already the second largest oil and gas producer in Australia, behind only Woodside Petroleum. The integration of Quadrant Energy's exploration and production (E&P) assets, which are predominantly located across the Carnarvon and Exmouth basins offshore Western Australia, will further boost Santos' reserves (combined 2C) and production by 26.0% and 32.0%, respectively, while generating synergies of about USD30.0-50.0mn annually, according to official estimates. Notably, the deal will see Santos take on Quadrant's 80.0% stake over the Dorado discovery in the North West Shelf (NWS), which has been touted to be Australia's largest oil find in more than two decades with 2C contingent resources of 283.0mn bbl of oil equivalents.
Column 1
0
Woodside Will Remain Largest Producer, Even After Santos-Quadrant Deal
1
% Share Of Crude Oil, Condensates & Sales Gas Production
2
3
Source: Company Data, Fitch Solutions
The deal expands Santos' growth options in the domestic LNG space, where cost-competitive brownfield expansions are increasingly being preferred by major producers to spearhead the next wave of LNG exports growth, at the expense of higher-cost greenfields. Santos is already a firm part of the industry shift towards brownfields, with several expansion options mulled for its Darwin LNG project in the Northern Territory, based off existing, undeveloped gas reserves across the nearby Barossa, Cash Maple and Greater Sunrise fields. Although Santos currently does not have any LNG position in Western Australia, the addition of Quadrant's gas assets in the Exmouth and Carnarvon basins, in addition to its existing gas plays in the Browse basin, will provide the firm with a wide array of commercialisation options in the state, including collaboration with major LNG project stakeholders such as Woodside Petroleum and Chevron for brownfield expansion and backfill works.
Column 1
0
Brownfields To Gain Tract, As Mega-Project Pipeline Rolls Off
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Australia - Natural Gas Production & Net LNG Exports, bcm
2
3
f = forecast. Source: JODI, Fitch Solutions
However, Santos' immediate focus will continue to be its projects in eastern Australia, where it is planning to invest up to USD950.0mn over 2018-2020 (equivalent to 40.0% of its projected capital spend over this period) to boost production. This will allow it to increase gas supply to both its Gladstone LNG project and the east coast gas market, which is at persistent risk of gas shortages and rising gas prices. Santos has borne the brunt of the government and public scrutiny for soaring gas prices in eastern Australia, due to its model of buying third-party gas from domestic markets to fill Gladstone LNG's export contracts.
To help avert a potential curb on its LNG exports, the firm has stepped up the development of additional gas resources in the area, mostly coal-bed methane (CBM) plays across the Surat, Bowen and Cooper basins. In May, Santos announced the decision to proceed with the development of the Arcadia CBM project in the onshore Bowen basin for USD300.0mn, which at peak can produce 75.0TJ of natural gas per day to end-users in Injune and Brisbane. Earlier, in February, the firm gave the green light to drill an additional 480 exploration and appraisal wells across the Maranoa, Western Downs, Central Highlands and Banana regions in Queensland for USD650.0mn. These projects could allow Santos to supply up to 20.0% of eastern Australia's expected gas demand in 2020, although regulatory barriers to onshore drilling at the local level and environmental opposition towards hydraulic fracturing are potential stumbling blocks.
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