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Santos Says LNG May Make Up Half of Output by 2020

April 15, 2007 (Bloomberg) -- Santos Ltd., Australia's third- biggest oil and gas producer, said liquefied natural gas may provide about half its production by 2020, with a new project in Papua New Guinea adding to a possible expansion in Darwin.

Santos may start LNG output in Papua New Guinea through an Exxon Mobil Corp.-led project in 2012-13 while production at the part-owned Darwin plant in northern Australia may be expanded in 2013-14, Jon Young, Santos's executive vice president of operations, told reporters today in Moomba, South Australia.

The Australian company started producing LNG in the first quarter last year at the ConocoPhillips-operated Darwin LNG plant, which has one 3.3 million metric tons-a-year processing unit and has regulatory approvals to produce as much as 10 million tons a year. Santos is among partners in gas fields in Papua New Guinea that last week agreed with Exxon Mobil to study an LNG project using gas from the Hides field.

"It's a sensible part of the business plan to want greater exposure to LNG, as it's obviously going to be an energy form that will be in tremendous demand," said Gavin Wendt, senior resources analyst at Fat Prophets Funds Management in Sydney. "Still, it's a very broad timeframe talking about 2020. I don't think it's going to add additional value for shareholders in the shorter term."

LNG is natural gas chilled to liquid form, reducing it to one six-hundredth of its original volume, for transportation by tanker to destinations not connected by pipeline. Asian LNG demand may more than double by 2020 to about 229 million metric tons, from 92 million in 2005, Edinburgh-based Wood Mackenzie Consultants Ltd. estimates.

'Legacy Assets'

"Sitting here today we see some opportunities in LNG that have the potential to be material legacy assets for this company," Young said. "It's a good business to be in. It's a great opportunity for Santos."

The second processing unit at Darwin may have a capacity of between 3.5 million and 6 million tons a year, Santos said in a presentation document handed out in Moomba. While Santos is aiming to provide gas for the expansion from fields in which it has a stake, such as Caldita and Barossa, the company faces competition from rival ventures such as the Woodside Petroleum Ltd.-operated Sunrise field in the Timor Sea, Young said.

"We recognize there are other fields up there, other joint ventures that are looking to do the same thing," he said.

Cooper Oil

For shorter-term expansion, Santos will look to increase output of crude oil in the Cooper Basin in central Australia and of coal seam gas, Young said. Santos is targeting a doubling of its share of oil output from the Cooper Basin to between 30,000 and 35,000 barrels a day by 2010, by which time that project may be the company's biggest oil producer, he said.

Beach Petroleum Ltd. and Origin Energy Ltd. have shares in the Cooper Basin oil and gas fields.

Santos is also expecting to about triple coal seam gas output in the next five years, after expanding it by 65 percent last year, Managing Director John Ellice-Flint said in a statement handed out in Moomba. The increase will help offset declining output from the mature Cooper Basin gas fields.

Still, Santos is forecasting little change in total output this year and next, with production at 59 million to 61 million barrels of oil equivalent, before rising on increasing flows from the Cooper Basin oil project and international ventures.

'Right Direction'

"Coal seam gas is a step in the right direction," Wendt said. "I think the market would still want to see a greater proportion of volumes coming from oil. The Cooper Basin oil project is not going to be a company-maker for them."

Appraisal drilling last year at Santos's Jeruk oil discovery in Indonesia was "disappointing," Young said. The company is still considering options for developing a production project and may discuss potential plans and fiscal terms with the Indonesian authorities toward the end of the year, he said.

"There may still be a commercialization opportunity available" to the field, Young said. "It's quite a technically challenging project. It will take some pretty innovative engineering and development concepts to make it work, but nonetheless we'll give it our best shot."

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

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