Russell: ADNOC must offer more than just money to make the Santos deal work.
Abu Dhabi National Oil Company's (ADNOC) $18.7billion bid for Australian liquefied gas producer Santos faces a much higher hurdle than the money offered.
The politics surrounding the deal, which would represent Australia's biggest-ever cash takeover in history, are becoming increasingly difficult to overcome.
ADNOC, Australia's second largest oil and gas company launched its bid in June, and a preliminary due diligence was to be completed no later than August. The deal was delayed from August 19 to September 19, despite the fact that no major problems were found with the transaction.
Santos shares, which ended Thursday at A$7.85 but are currently trading below the indicative price of A$8.89 are indicators that the deal may be struggling.
The proposed takeover became a hot topic at the South East Asia Australia Offshore and Onshore conference in Darwin this week, the capital of Australia's Northern Territory and where Santos' Darwin LNG Plant, which is soon to restart, is located.
The Australian government and industry participants were largely of the opinion that the deal wasn't compelling enough.
The fact that people were willing to talk about this deal but not go on record shows that the ADNOC offer is a political minefield. It is best to keep quiet.
The question is, other than the good payout for Santos shareholders and adding new complications to an already strained domestic gas market, why would Australia sell some of its crown-jewel LNG assets?
The Australian Treasurer Jim Chalmers must approve the deal. While he wants to maintain Australia's image as a safe, welcoming investment destination, it is also important to him that selling an energy company to a foreign-owned company will not be popular.
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What would ADNOC need to do in order to close the deal?
ADNOC has a major problem in that it plans to buy existing assets. It also does not have a plan for growing the business or investing in Australia.
It is a far cry from the $200 billion that was invested in Australia's LNG production by mostly foreign oil firms in the decade between 2010 and 2020. At the time, it was the largest in the world.
Santos's appeal is the fact that it has two LNG plants already in Australia, a stake in a plant in Papua New Guinea and a share of another PNG project due for a decision on investment early next year.
ADNOC may be less interested in Santos onshore Australian assets that supply gas to the domestic market. ADNOC may not have said anything but it would not be surprising if they tried to sell their onshore production to another operator.
ADNOC has many opportunities to demonstrate that it is willing and capable of building on the Santos Portfolio.
Santos owns exploration acreage within the Beetaloo Basin of the Northern Territory. This area holds promise as the next big thing in Australian natural gas. The geology is superior to similar shale play in the United States, and the estimated reserves of gas are 500 trillion cubic foot.
ADNOC's commitment to build the Beetaloo and the pipeline infrastructure that will connect it to the newly built LNG train next to Santos Darwin plant would be a great way to convince Australians that ADNOC wants more than control over the existing LNG assets.
ADNOC will have to speak more about their plans and the commitments they are willing to make if it wants to increase its chances of winning support from politicians.
Chalmers, the centre-left Labor Party and other opponents of the deal will have no problem rejecting it on the basis of national interest.
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These are the views of the columnist, who is also an author. (Editing by Tom Hogue).
(source: Reuters)
