Has the Santos takeover handed the government a gift on energy security?

Australia Broadcast Center

5 hours ago

The South Australian Northern Territory Oil Search, the firm otherwise known as Santos, may finally have met its match.
After years of underperformance, promises never quite fulfilled and takeover offers that went nowhere, the 71-year-old company finally raised the white flag this week, recommending shareholders accept a whopping $36 billion takeover bid from a foreign government.
But it's hardly a done deal.
Bigger than a mere commercial transaction, it involves a foreign government — Abu Dhabi — its sovereign wealth fund and a private equity group.
And it's a takeover bid for a vital piece of national infrastructure that has invoked the ire of the three most recent prime ministers during the past decade for failing to act in the interests of Australians.
Then there is the sticky issue of the role of gas, given the transition to renewable energy, and the guarantee of supply.
For this deal to get across the line, the buyer will need to jump through multiple regulatory hoops, delivering the federal government a once-in-a-lifetime opportunity to nail down domestic supplies.
According to Rick Wilkinson, a former Santos executive and now the chief executive of advisory firm EnergyQuest, he was more surprised by the identity of the bidder than the offer itself.
There has been a spate of big takeovers, including Woodside's takeover of BHP's oil and gas interests, as banks tighten lending on fossil fuels and juniors are squeezed.
"We know that there's a consolidation trend within the oil and gas industry at the moment where various players are looking for scale and move into new markets," he told the ABC's Kirstin Aitkin.
"So, the fact that there was someone interested in Santos itself wasn't such a big surprise. It's interesting that it came out of the UAE in the Middle East."
It's been a long time coming. Alan Bond, the disgraced entrepreneur from the "decade of greed", had a go in the late 1970s.
For decades, after Bond retreated, the South Australian government imposed a 15 per cent shareholding cap that made Santos takeover-proof but did little to lift its performance. That was only lifted in 2007.
And since 2017, there have been several tilts that were repelled by the Santos board, including a proposal last year from Woodside to join forces in an $80 billion gas giant.
This all-cash offer from the Abu Dhabi National Oil Company, however, is understood to be the richest in history. There have been bigger takeovers, but they've included shares as payment.
But it's far from certain the transaction will proceed.
While such a transaction automatically would attract the full glare of the Foreign Investment Review Board, the light will be more intense than usual given the bidder is a foreign government.
Given Santos has operations in Papua New Guinea and Alaska, offshore approvals are likely to be required.
Even investors, many of whom should be ecstatic at the 30 per cent premium the Emiratis are offering, are unconvinced the deal will proceed.
The share price surged on Monday and is now sitting around $7.75. But that's still way below the $8.89 slapped on the table after the market closed on Friday, indicating nerves about the outcome and the lengthy delays that may be involved.
For a little perspective, the stock price is now level-pegging its position from 20 years ago, as this graph of Santos share performance illustrates.
The Emiratis first approached the Santos board back in March. They were rebuffed, returned for a second bite before being turned away again and finally clinched agreement from the Santos board late last week.
But Treasurer Jim Chalmers went to great lengths on Tuesday to warn the deal had a long way to go before a decision was made.
"First of all, there will be a range of views, including the South Australian government's, and I think it is appropriate people express a view," he told the ABC's Patricia Karvelas
"This is potentially a very large transaction and there are always a number of steps that have to happen before it becomes a transaction.
"I will listen very closely, if it comes to it, to the advice of the Foreign Investment Review Board but I won't pre-empt that advice."
When it comes to major resource transactions, and particularly energy, the question of national interest is invoked. And the precedent was set by former treasurer Peter Costello, who kiboshed Shell's $5 billion bid for Woodside back in 2001.
That was a commercial transaction. This deal involves a foreign government, which means an added layer of scrutiny.
Perhaps the most contentious issue for the treasurer will be the role Santos has played in denuding the supply of gas to Australia's east coast.
For decades, it supplied endless quantities of cheap gas from the Cooper Eromanga Basin in the arid borderlands that stretch across NSW, South Australia, Queensland and the Northern Territory.
But around 15 years ago, it joined the push to begin exports from the east coast. It identified vast quantities of coal seam gas in Queensland and then built a massive LNG terminal on Curtis Island off the Queensland coast.
But it struggled to extract the gas and, having already secured long-term contracts in Asia, it was forced to export gas that previously had fed the domestic market, sending gas prices into orbit.
There is now a suggestion that authorities could use this as a lever to force the east coast exporters to agree to a domestic reservation policy along the lines in force in Western Australia.
"I would say once you enter the hands of the Foreign Investment Review Board, all things are open for negotiation and if there are any particular concerns then the two parties that are involved will need to address those," says Rick Wilkinson.
"If it's about how sure the domestic gas future is for Australia, then if the firm decides to bring that on, then that will need to be addressed."
For the Abu Dhabi National Oil Company, it may be a small price to pay.