As discussed in our 8th July note "Thoughts re potential Shell involvement in GLNG", media reports (AFR and Australian) speculate that STO is close to inking an agreement with fellow CSM LNG aspirant Shell for equity participation in GLNG. Our working assumption is that Shell intends to lead a consolidation of the STO/Petronas project and its own Curtis Island project (a JV with PetroChina). We view this as a logical tie up - Shell brings its balance sheet, LNG execution experience and large potential customer in PetroChina, and STO brings a more mature project in terms of approvals and contracting a workforce, upstream CSM operating experience and a customer in Petronas. Additionally, Shell and Petronas have strong ties in other parts of the world and there are significant midstream and downstream efficiencies to be had in merging the projects. In light of this possible merger we think it is reasonable to consider the likelihood/rationale for a tie up between BGs QCLNG and Origin/Conocos APLNG. STO has confirmed it remains in discussions with parties regarding participation in GLNG but there is no guarantee an agreement will eventuate. As the only Gladstone project yet to enter LNG sales agreements, APLNG is a relative laggard despite its leading reserves position. The ORG/Conoco motivation for a project merger could be to provide some LNG contracting momentum and to ensure it is not materially deferred due to lack of a workforce. The motivation for BG is not so apparent, as QCLNG is fully contracted and in the final stages of the approvals process. This does imply however that BG would be negotiating from a position of strength. We have examined what two mega Gladstone projects might look like in terms of equity participation. We have used two observable and quantitative metrics - market values from executed deals and 3P reserve positions. While both methods have flaws, they serve to highlight that a potential STO/Petronas/ Shell/PetroChina deal is doable but a potential BG/ORG/Conoco deal may prove challenging. Federal approval for Qld CSM LNG projects deferred - ALERT AFR reporting that federal Environment Minister Peter Garrett will defer his decision on STO/Petronas' GLNG and BG's QCLNG until at least Oct 11th. Federal environmental approval is the final step in the approvals process for STO and BG with both having received Qld state approvals. Garrett has requested more information from the applicants regarding water handling solutions and long term impacts on water tables and waterways. We highlighted the risk of a federal approvals delay in our 6th July note "Oil and Gas sector: STO remains top pick after fiscal uncertainty resolved", noting " Qld environmental approval was given on 28 May 2010, and Federal approval is expected within a matter of weeks. We note however that certain environmental issues such as associated water and brine disposal were not adequately dealt with in the EIS, and the Qld Coordinator-General required that Santos provide more planning detail before the state environmental authorities would be issued". While the long term environmental impacts of large scale CSM production present a valid concern for regulators, we cannot help but think there is a strong political element to Garrett's deferral. We can think of two reasons (outside of legitimate and appropriate federal rigour applied to the approvals of these complex projects) why Garrett may want to stall the approvals process, 1) he would want to be seen to be applying appropriate due diligence after accusations from the Greens Party (among others) last year that he rubber stamped the federal approval of Chevron's Gorgon project on environmentally sensitive Barrow Island, particularly relevant given how Garrett's political star has faded, and 2) October 11th seems conveniently timed to fall after a probable federal election, i.e. could be seen by Labor government as a populist move ahead of election. Regarding the latter point, this could backfire on the Labor government a la RSPT and the federal government should be wary of entering another federal Labor vs. Qld Labor stoush or another federal Labor vs. big business stoush, especially after Gillard had successfully mended the RSPT rift. We can see two differentiating factors however between federal government taking on CSM LNG players and the government vs. miners RSPT issue, 1) aside from Santos and Origin, most of the CSM LNG proponents are offshore big oils (Shell, BG, Petronas, Conoco, PetroChina), and 2) BP Gulf of Mexico incident wont be helping curry favour for big oil on the environmental front. We doubt whether BG or STO/Petronas would have been anticipating a rubber stamp from Garrett a three month deferral will be a concern however, particularly for STO which according to some media by all accounts is in advanced stages of GLNG participation discussions with Shell, Kogas and Sinopec. We note that projects can progress rapidly to FID once approvals are granted, take the case of Gorgon which received federal approval on 26th August 2009 and made a FID on 13th Sept 2009. This was a project that largely contracted its gas ahead of achieving environmental approvals. We remain positive on STO, noting that requests for more information from are par for the course in the approvals process.
Posted on HotCopper as information only. Investors should not rely on this information without conducting their own research
STO Price at posting:
$13.90 Sentiment: Hold Disclosure: Held
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