Santos in Talks to Settle Indonesia Mudflow Liability

By Angela Macdonald-Smith

Dec. 10 (Bloomberg) -- Santos Ltd., Australia’s third- biggest oil and gas producer, is in talks about a settlement of its liability for a mudflow disaster in Indonesia, which analysts say could make it a more attractive bid target.

The discussions with Lapindo Brantas Inc., the operator of Santos’s 18 percent-owned exploration venture in East Java, are not complete and there is “no certainty of an outcome,” Adelaide-based Santos said today in a statement to the Australian stock exchange.

A settlement, which would need to be approved by Indonesian regulators, could be reached as early as Dec. 12, the Australian Financial Review reported today, citing a Lapindo Brantas spokesperson that it didn’t identify. Mud started flowing from the Banjar Panji gas exploration well after a blowout in May 2006, inundating homes, rice fields, factories and roads.

The discussions with Lapindo Brantas involve “a practical and appropriate resolution” of Santos’s involvement in the venture as a minority partner with no controlling rights, Santos said in the statement, without elaborating.

Santos’s stake in the mudflow disaster acts as a “poison pill” that is likely to deter potential bidders, Credit Suisse Group said yesterday in a report. The company on Nov. 29 had a 15 percent limit on individual shareholdings removed by the South Australian state government, clearing the way for offers. China National Petroleum Corp. is considering linking with a partner for a bid, the South China Morning Post reported Dec. 8.

‘Downside Risk’

“We think that this mud exposure is an issue for any company contemplating a takeover of Santos,” Credit Suisse said. “We cannot see in its present form, with the continuing uncertainty about where the ultimate liability resides, any corporate wanting to be exposed to any speculated downside risk.”

Santos is in talks to sell its 18 percent stake in the drilling venture to a company related to the Bakrie family, the Review reported, citing the Lapindo spokesperson that it didn’t identify. Lapindo is controlled by the family of Indonesia’s Welfare Minister Aburizal Bakrie.

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