By Angela Macdonald-Smith
Dec. 11 (Bloomberg) -- Santos Ltd., Australia’s third- biggest oil and gas producer, agreed to pay $22.5 million to offload its stake in an Indonesian venture affected by a mudflow incident, reducing its exposure to damage claims.
The 18 percent interest in the Brantas production sharing contract will be transferred to Minarak Labuan Co., a company associated with the venture operator Lapindo Brantas Inc., Adelaide-based Santos said today in a statement to the Australian stock exchange.
Mud started flowing from the exploration venture’s Banjar Panji well in Sidoarjo, East Java, after a blowout in May 2006, inundating homes, rice fields and factories. While the transaction with Minarak doesn’t remove possible third-party claims against Santos, the company said it believes it would be able to successfully defend any that arose.
“This is looking like the best possible exit strategy for Santos,” said Gavin Wendt, resources analyst at Fat Prophets Funds Management in Sydney. “We still can’t rule out third- party claims, but with every passing day that probably becomes slightly less likely.”
Santos gained 6.5 percent to A$14.80 in Sydney, outpacing a 0.2 percent advance in the exchange’s benchmark energy index.
Mud Provisions
In February, Santos increased its provision for the incident by $7 million to $79 million. Credit Suisse Group had assumed a charge of A$30 million ($20 million) a year for 10 years for the liability. The Australian Financial Review said Sept. 15 Santos’s share of the mitigation costs could be as high as A$830 million.
The $79 million provided for in Santos’s accounts has been “exhausted” with the payment of the $22.5 million to Minarak and previous outlays for mud management and mitigation costs, Santos Chief Executive Officer David Knox told reporters on a conference call. The company doesn’t expect to make any further provisions, he said.
The mudflow incident has “been of considerable concern,” Knox said. The fact that Santos was a minority partner in the venture, wasn’t the operator and wasn’t on site at the time of the well blowout all give the company confidence it will be able to defend any claims in the future from third parties, he said.
The transfer of the stake has been approved by BPMigas, the Indonesian oil and gas industry regulator, Santos said.
‘Lusi’ Volcano
The mud volcano, which has displaced more than 30,000 people and caused millions of dollars in damage, was caused by the drilling of the well, an international team of scientists led by Professor Richard Davies of Durham University concluded in June.
Lusi, as the volcano has become known, is flowing at 100,000 cubic meters a day, enough to fill 53 Olympic swimming pools, the scientists said in a statement released by the university in England. The flow’s name comes from lumpur, a local word meaning mud, and Sidoarjo.
Santos’s stake in the mudflow disaster acted as a “poison pill” that was likely to deter potential bidders for the company, Credit Suisse Group said in a Dec. 9 report. The company on Nov. 29 had a 15 percent limit on individual shareholdings removed by the South Australian government, clearing the way for offers.
China National Petroleum Corp. is considering linking with a partner or a bid for Santos, the South China Morning post reported Dec. 8. The deal announced today wasn’t connected to the removal of the shareholding cap, Knox said.
To contact the reporter on this story: Angela Macdonald-Smith in Sydney at amacdonaldsm@bloomberg.net
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