Santos Eyes Power Generation to Speed Gas Development

By Angela Macdonald-Smith
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Aug. 21 (Bloomberg) -- Santos Ltd., Australia's third- biggest oil and gas producer, said it plans to move into electricity generation to speed the development of its natural gas reserves and tap rising demand for cleaner power.

The proposed A$800 million ($698 million) Shaw River plant in Victoria state will take advantage of the ``fast-growing market'' in gas-fired power production, Chief Executive Officer David Knox said today. Adelaide-based Santos jumped the most in 12 weeks in Sydney trading after announcing a 58 percent gain in first-half profit and a share buyback.

Australia is due to start an emissions trading system in 2010, boosting demand for power generated from cleaner fuels such as gas by placing a cost on carbon. Santos, the biggest gas supplier into the Australian market, has a stake in the $1.1 billion Kipper and the A$275 million Henry gas projects, both being developed off the southeast coast.

``The move down the value chain into power generation makes sense in that they are going to be long in gas in Victoria,'' said Brendan Warn, an oil and gas analyst at Macquarie Group Ltd. in Sydney.

Santos rose 98 cents, or 5.7 percent, to A$18.18 on the Australian stock exchange, the highest close for almost a month.

The 500-megawatt generator could be expanded to 1,500 megawatts, Knox said on a conference call after the release of first-half earnings. The board may approve the investment by the end of 2009, allowing production to start in 2012.

`First Foray'

``This is our first foray into this area and it's driven by a drive to see our molecules move,'' Knox told reporters. ``We recognize that in response to carbon trading we believe gas- fired power will becoming increasingly important and we want to be part of that. It provides us with opportunities.''

Santos hasn't yet decided how the project, which includes the construction of a 105-kilometer (65-mile) pipeline, will be financed or what equity stake it will hold, Knox said. It may take gas from the Longtom and Kipper fields off the southeast coast, he said.

Net income climbed to A$303.7 million, or 48.1 cents a share, in the six months ended June 30, from A$192.7 million, or 29.3 cents, a year earlier, Santos said today in a statement to the exchange. Profit before one-time items rose to A$289 million, compared with a consensus of A$295 million cited by UBS AG.

Santos in May reached a A$2.51 billion accord with Malaysia's Petroliam Nasional Bhd. to sell a stake in a planned liquefied natural gas project and said today it will buy back A$300 million of shares to distribute some of the proceeds to shareholders.

Reindeer Gas

It declared an interim dividend to 22 cents a share, up 10 percent on the final dividend last year, and will also repay debt as part of the capital management plan.

``It's a robust result; it's within consensus,'' Macquarie's Warn said.

Santos and partner Houston-based Apache Corp. will ``very soon'' announce sales contracts for gas from the Reindeer project off northwest Australia, Knox said. The contract will be at a ``very good price,'' reflecting rising demand for the fuel from mining companies and a gain in prices, he said.

Santos and Petronas expect to start engineering and design work on the Gladstone LNG project by year-end, Knox said.

Sales advanced 14 percent to A$1.4 billion, buoyed by gains of more than 40 percent in Australian dollar-denominated oil and condensate prices compared with a year earlier. Production fell 8 percent to 27.6 million barrels of oil equivalent due to field shutdowns in Western Australia.

The company reiterated its reduced full-year production forecast of between 54 million and 56 million barrels of oil equivalent. Output will be ``relatively flat'' over the next several years before surging in 2013 or 2014 with the start-up of LNG output in Papua New Guinea and at Gladstone, Knox said.

To contact the reporter on this story: Angela Macdonald-Smith in Sydney at amacdonaldsm@bloomberg.net