South Korea's growing demand for natural gas has driven giant conglomerate SK Group to its biggest investment in Australia, as it agreed to pay up to $520 million for a stake in two fields off the north coast held by ConocoPhillips and Santos.
The deal will lead to SK's power and gas unit paying for three wells to be drilled at the Caldita-Barossa deposits, about 300 kilometers north-west of Darwin, with a view to proving up enough gas for conversion into LNG.
Should enough be found, it may underpin a long-awaited expansion of Conoco's Darwin LNG project or support a floating venture, said Santos vice-president WA and Northern Territory, John Anderson.
Rising electricity use is expected to lift LNG demand in South Korea, the world's second-biggest importer of the fuel, by 40 percent by 2024. Korean LNG contracts are helping underwrite Santos' $16 billion GLNG project, Chevron's Gorgon venture and gas from Shell's floating Prelude plant.
SK's E&S subsidiary, which currently imports LNG only from BP's Tangguh plant in Indonesia, is increasing purchases of LNG to supply planned new power plants that will head off an electricity shortage, a spokesman in Seoul said yesterday.
He said SK was attracted to the Caldita-Barossa venture because of relatively low transportation costs from the Timor Sea to Korea, the technical viability of the resource, and the reliability of the partners in Conoco and Santos.
"Those three factors meant those fields met our criteria," he said.
SK will initially pay $260 million in drilling expenses to acquire a 37.5 percent interest in the Caldita-Barossa fields. It will then have the option of raising its stake to 49.5 percent with a further $60 million payment to Conoco and Santos.
SK will also fund up to $90 million in initial engineering and design work for the project, with the work to get under way in 2014, subject to the results of the drilling.
Should an LNG project go ahead, the Korean group will pay a further amount of up to $110 million as various milestones are met, including a final investment decision and first delivery of LNG cargoes.
Conoco's stake in the venture will initially fall to 37.5 percent from 60 percent, while Santos's drops to 25 percent from 40 percent.
Should SK exercise the option to raise its interest, it will become the biggest partner, with the US company's holding falling to about 30 percent and Santos' to about 20 percent.
Santos chief executive David Knox signalled last month a deal was getting close on Caldita-Barossa after long expressing frustration about a lack of progress towards development of the resource. The company has been on a mission to monetise its undeveloped gas fields off the north coast, and the deal with SK is the third of a string of transactions that have realised a higher value for the assets than most analysts were giving credit for.
Santos sold its Evans Shoal asset last year to Italy's Eni for up to $350 million, and previously divested part of its interest in the Petrel and Tern deposits to France's GDF Suez for a floating LNG project.
The deal with SK "is positive for Santos because it's a stranded gas asset that we probably don't value as highly as the transaction implies," said UBS energy analyst Gordon Ramsay. "This moves it a further step forward to potential commerciality."
The Caldita-Barossa deposits in the Timor Sea are regarded as a [potential candidate to feed an expansion of ConocoPhillips' Darwin LNG project. That plant currently consists of a single train producing about 3.5 million tonnes per year of LNG but the site has full environmental approval for up to 10 million tonnes a year of production.
Conoco's president of its Australian business, Todd Creeger, said yesterday that Darwin was one option for commercialisation, alongside a floating project.
The determining factor on how the fields will be developed will be the appraisal drilling program, which should get under way in early 2013, Santos' Mr Anderson said.
"Clearly the more gas we can show is recoverable it will start to swing it towards Darwin," he said.
The fields are thought to hold quite a lot of the contaminant CO2, however, which would need to be removed.
The Korean funding should completely cover the drilling costs, effectively giving ConocoPhillips and Santos a free option over the three wells in exchange for diluting their interest in the resource.
NT Chief Minister Paul Henderson said the deal meant a potential new gas project for the territory.
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