Santos Limited (STO)
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A foot in both camps

 7 Mar 2023
Sector: Energy

PAPUA LNG FEED ANNOUNCED

Need To Know

  • Front end engineering and design (FEED) announced for Papua LNG project
  • STO has 22.8% stake in Papua LNG
  • Papua LNG will have initial capacity of 4mtpa plus access to 2mtpa tolling through PNG LNG

Quietly sitting in the background of Santos’s portfolio is Papua LNG, a sibling to the big PNG LNG project. Papua LNG’s shareholders have taken a big step towards sanctioning this project by announcing the critical FEED entry. STO has a foot in both camps with a stake in each of PNG’s major LNG projects.

TotalEnergies (40.1% and operator), ExxonMobil (37.1%) and STO (22.8%) have launched the FEED that will lead to the final investment decision (FID) for Papua LNG. The PNG Government has a back-in right for up to 22.5% at FID, which is currently planned for the end of 2023 or early 2024. If exercised, STO’s stake would reduce to 17.7%.

Papua LNG will consist of four electric LNG trains (e-trains) with a combined capacity of 4mtpa to be developed within the existing PNG LNG project site. Papua LNG has secured access to up to 2mtpa of capacity at PNG LNG for which it would pay an access fee, pro-rata opex and on-going processing toll revenue. PNG LNG’s current capacity is ~9mtpa.

Investment View

It is worth noting that STO will be paying 17.7% of the tolling arrangement costs (assuming the Government takes up its stake) but will receive 37.5% of it courtesy of its PNG LNG stake (assuming completion of the 5% sale to the PNG Government). A similar benefit occurs for the opex and access fee. Although these figures are unknown at this point, there will be positive value to be ascribed to STO.

The upfront capex for Papua LNG is unknown at this point (could be circa US$10bn) so there is some uncertainty on the financial aspect of the project. We do know that the key ingredients such as the partnership and scope of the project are very positive. Another small yet positive factor will be the re-injection of CO2 into the reservoir, reducing the carbon intensity of the project.

First gas from Papua LNG is probably about 5 years away, but this is a significant step in realising the value of the project. 

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Stock Overview

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Company Overview

Santos is an Australian-based oil and gas producer with assets in the Cooper Basin, PNG LNG (42.5%), Papua LNG (22.8%), Bayu-Undan and Darwin LNG projects (43.5%), Barossa (62.5% reducing to 50% on partial sale to JERA), Gladstone LNG (30%) and the Pikka Unit in Alaska (51%).

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