By Angela Macdonald-Smith
Dec. 8 (Bloomberg) -- Apache Corp. and Santos Ltd., partners in a A$900 million ($586 million) natural gas project in Australia, shelved the venture and scrapped some construction contracts after failing to complete a gas accord.
The development of the Reindeer gas field off the northwest coast has been deferred because of the effect of the economic downturn on the proposed major customer for the fuel, Adelaide- based Santos said today in a statement to the Australian stock exchange. The contracts being terminated were worth A$390 million, said Clough Ltd., which was building the project.
Houston-based Apache and Santos in April decided to build the project in Western Australia, where prices for gas have tripled on a shortage. The value of Australian mining and energy projects fell 4 percent in November from April as the economic outlook worsened, the government’s commodities forecaster said.
“There are lots of projects out there being canceled,” said Graeme Bethune, chief executive officer of EnergyQuest, an Adelaide-based consultant. “The fact they say this will require the suspension or termination of certain engineering and construction contracts suggests that they don’t have any other customer immediately in mind.”
Santos, Australia’s third-biggest oil and gas producer, rose 9.1 percent to A$13.25 in Sydney after the South China Morning Post said China National Petroleum Corp. may link with a partner for a takeover bid. Clough fell 3.2 percent to 30 cents.
Devil Creek
The venture, which included building the onshore Devil Creek plant south of Karratha, was set to supply the equivalent of a fifth of the state’s existing market, starting in mid-2010.
Reindeer gas was due to be sold to a Chinese-backed iron ore project in a seven-year contract, Apache said in September. Citic Pacific Ltd., the Hong Kong-traded arm of China’s biggest state- owned investment company, is developing a A$5.2 billion iron ore project in Western Australia, to start production in early 2010.
The project was worth about 70 cents a share to Santos, or about 4 percent of the net present valuation of about A$20, said Stuart Baker, an analyst at Morgan Stanley in Melbourne.
“It’s probably not the only project that’s going to suffer on the energy supply side, given that the guys on the other side are hurting or simply can’t pay,” Baker said. “The fact it’s half done means it could come in in short order if they did get the contracts or markets sorted out.”
Alcoa Contracts
Apache and Santos had spent about A$200 million so far on Reindeer, said Aidan Joy, business development manager at Apache’s Australian unit. Resuming the project will depend on an upturn in the commodities market, he said.
“We’re seeing an across-the-board softening in gas demand, particularly among resource-sector projects,” Joy said by telephone from Perth. “The commodity price weakening left us with no choice but to defer the project at this time. We’ll resume it just as soon as the economic circumstances are right.”
Work will continue on regulatory approvals to ensure a “timely” restart once gas contracts are completed, Santos said. Apache owns 55 percent of Reindeer, and Santos the rest.
The next opportunity to secure a gas customer may be when some of Alcoa Inc.’s contracts expire in 2012, Baker said.
Perth-based Clough will work with Apache “to bring the work to an orderly halt in order to preserve the value of the investment made to date,” Chief Executive John Smith said in a statement.
Apache is continuing its expansion in Australia outside of Reindeer, Joy said. The Van Gogh oil project, also off the northwest coast, is due to start production in the second quarter of 2009, while the Pyrenees venture, operated by BHP Billiton Ltd., is scheduled to begin output in the first quarter of 2010, he said.
To contact the reporter on this story: Angela Macdonald-Smith in Sydney at amacdonaldsm@bloomberg.net
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