Australian Energy Producer Santos Seeking Collaboration with Peers to Cut Costs

on Nov 26, 2012

On 25 November 2012, Bloomberg reported that Santos Ltd (ASX:STO), Australia’s third-biggest oil and gas producer, was considering collaboration with rivals to battle rising costs threatening $156 billion (£97.5 billion) of developments proposed by the industry in Australia. Santos however is not the only producer struggling with rising costs connected to liquefied natural gas projects (LNG) in Australia, with Reuters recently reporting that the energy giant Royal Dutch Shell (LON:RDSA, LON:RDSB, NYSE:RDS.A, NYSE:RDS.B) was likely to delay a final decision on whether to push ahead with its Arrow LNG project in Queensland.

**Santos Planning to Collaborate with Rivals**
Bloomberg quotes Santos’ CEO David Knox as saying that the Adelaide-based oil and gas producer wanted to “join forces” with competitors at a range of levels. Mr Knox, who was speaking on the Inside Business programme on the Australian Broadcasting Corp, noted that some government regulations served little purpose other than driving up the company’s costs. “Costs in Australia are extremely high and it is a concern,” commented Mr Knox, as quoted by Bloomberg.

Santos is currently constructing the $18.5 billion Gladstone project in Queensland, which is one of the seven LNG projects being developed in Australia to meet rising energy demand from Asia. In addition, Santos is also taking part in the Papua New Guinea LNG joint venture with Exxon (NYSE:XOM) and several other partners, including Oil Search (ASX:OSH), with Exxon recently announcing that the estimated cost for the PNG LNG project had increased by more than 20 percent, from $15.7 billion to $19 billion.

**LNG Industry Cooperation**
Mr Knox told the ABC that the LNG industry in Australia was already cooperating in terms of sharing some resources such as safety statistics and medical evacuation helicopters, to cut costs on the east coast of Australia, with this type of cooperation likely to spread to projects on the west coast of Australia.
!m[Rising Expenses Threatening LNG Projects Down Under ](/uploads/story/896/thumbs/pic1_inline.png)“Each one of us, in some respects, are seeking to join forces in both the upstream and the downstream where it makes sense,” Mr Knox said, as quoted by Bloomberg. “We’re seeking opportunities to work together and you’re going to see that continue. There are opportunities to do exactly the same in Western Australia.”

**Australia’s Overheated LNG Development Market**
Santos is yet another energy producer struggling with the rising costs of Australian LNG projects. On November 20, Reuters reported that Royal Dutch Shell might delay the final decision on whether to continue with the development of its Arrow LNG project in Australia, with the project to be built in partnership with PetroChina (SHA:601857, HKG:0857). Reuters quotes sources as saying that the cost of the Arrow LNG project may have increased to $34-$36 billion from the initially estimated $24-$26 billion.

“Shell could actually be a significant beneficiary of taking a more measured approach,” noted Geoff Barker, a partner with Resource Investment Strategy Consultants, as quoted by Reuters, adding that Shell’s decision to push back the development was rational given the overheated LNG development market in Australia as well as risks that have pushed costs up for other projects.


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