UPDATE: Santos To Supply Cooper Basin Gas To Gladstone LNG

Santos Ltd. (STO.AU) said Monday it will supply conventional natural gas from assets in central Australia to its gas export joint venture in Queensland state, dousing concerns the massive project will experience a gas supply shortage.

The Adelaide-based group also said that the Cooper Basin's vast untapped shale gas reserves, currently considered by many analysts to be too expensive to produce, could also be worked into the supply deal, which has been struck at prices linked to the prevailing oil price.

Faster development of Cooper Basin shale gas would be great news for Beach Energy Ltd. (BPT.AU), which is currently sinking substantial capital into developing its shale gas reserves.

Santos and joint venture partners Petroliam Nasional Bhd. and Total S.A. (TOT) had originally planned to feed their liquefied natural gas project at Gladstone only with coal seam gas from southern Queensland. Analysts, however, are concerned that Santos may not be able to prove up sufficient coal seam gas reserves in time to support a two-train LNG project.

In a surprise deal, Santos said Monday that it will supply 750 petajoules of uncontracted gas, primarily from the Cooper Basin in central Australia, to the Gladstone LNG project for 15 years commencing 2014.

The deal is surprising because reserves in the Cooper Basin, once Australia's premier oil and gas hub, are in decline following decades of exploitation. Santos, however, has introduced enhanced drilling technology to squeeze more conventional oil and gas out of the area.

Discussions are currently being held with other Cooper Basin joint venture partners about participating in the pact. These include Beach and Origin Energy Ltd. (ORG.AU).

Beach is currently drilling exploration wells in the Cooper Basin to test the geological characteristics of its shale gas reserves, despite some analysts' concerns that the cost of production will be uncompetitive with cheap coal seam gas reserves in Queensland state and conventional reserves sourced offshore south-east Australia.

"Getting an oil-linked price on a long term contract like this is a commercial driver to develop unconventional gas in the Cooper," a Santos spokesman said.

The supply deal is conditional on the Santos LNG joint venture making a final investment decision on a second LNG processing unit -- a decision it's targeting by the end of 2011.

Gas from the Cooper would be supplied to both LNG processing units, the spokesman said, adding that there are no technical difficulties associated with running conventional gas and coal seam gas through the same LNG processing unit.

Security of gas supply to Gladstone LNG may help Santos progress LNG sales talks it's currently engaged in with Korea Gas Corp. (036460.SE) and other potential Asian buyers.

By 0045 GMT, Santos shares were up 2.6%, Beach was up 9.0% and Origin was up 2.0% compared with a 0.9% rise in the benchmark S&P/ASX 200 index.

-By Ross Kelly, Dow Jones Newswires; 61-2-8272-4692; Ross.Kelly@dowjones.com

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