Chalmers’ big gas decision looms
by Tony Wood
Federal Treasurer Jim Chalmers may have a decision to make on the proposal for foreign-controlled ownership of Santos. In the absence of a clear national gas strategy, his decision will say much about how the second-term Albanese Government views the role of gas in Australia’s domestic and international interests.
Santos is a 70-year-old, listed Australian oil and gas business with a market capitalisation of $25 billion at close of trading on Friday. A consortium led by XRG, the foreign investment arm of the Abu Dhabi National Oil Company (ADNOC) has proposed a $36.4 billion takeover, comprising $8.89 per share and the company’s debt. The Santos Board has indicated support for the bid, subject to the usual conditions on such proposals.
The size and nature of the business means the proposal will be subject to review by the Foreign Investment Review Board (FIRB) and a decision by the Treasurer. It is this hurdle that is weighing on the market’s view of the likely outcome.
Santos is a major Australian oil and gas company. Domestically, it is the second-biggest supplier of gas to Western Australia and has been a long-term operator of the Moomba gas processing hub in South Australia, a facility central to east coast gas supply for more than 50 years. Santos also has a 30 per cent share in one of three LNG export facilities based in Gladstone. Its Papua LNG business adds to that export capability.
It may come down to the judgement of Treasurer Chalmers on the question highlighted by previous Santos chairmen in this masthead.
Growth prospects include the Narrabri project in northern NSW, the Barossa and Beetaloo projects in the Northern Territory, the Pikka oil project in Alaska, and the Dorado project off the WA coast. Strains on the balance sheet led to the deferral of the Dorado project to put more focus on shareholder returns than higher output. ADNOC clearly highly values this asset profile in a time of geopolitical uncertainty. Delivering the growth prospect would be enhanced by the ADNOC proposal.
This broader background will also feed into the FIRB’s considerations. Transactions in the oil and gas sector, particularly those involving critical infrastructure or sensitive data, are subject to increased scrutiny under national security provisions.
The process will be complex. Foreign investment is a desirable thing for the Australian economy and is not per se in conflict with the national interest, rather the opposite. Decisions in recent years by three treasurers provide some perspective.
In 2001, Shell wanted to increase its interest from 34 per cent to 56 per cent of Woodside, the operator of the North-West Shelf gas project, a business with the prospect to become Australia’s biggest export earner. FIRB could not agree on its advice to Treasurer Peter Costello. Ultimately, he accepted the argument that Shell could not be trusted to place Australian interests ahead of its other Asian investments.
In 2016, Treasurer Scott Morrison rejected the Chinese Government’s State Grid and Hong-Kong based CKI’s bids for the NSW electricity distributor Ausgrid, citing “national security issues with this particular asset” without naming them. He did say that the FIRB had identified such issues. This decision followed previous approvals of bids from State Grid for energy distribution businesses in South Australia and Victoria
In 2018 CKI, already the owner of Australian electricity and gas distribution assets, proposed to buy the APA Group, Australia’s largest oil and gas transmission business. The ACCC had approved the bid subject to an enforceable divestment undertaking, and the FIRB did not reach a unanimous ruling. Treasurer Josh Frydenberg rejected the bid on the grounds that it would result in excessive concentration of foreign ownership.
There is a consistent thread to the Costello-Morrison-Frydenberg decisions. All were complex with individual characteristics, the FIRB did not determine the outcome, there were strong arguments on both sides, and the Treasurer took the final decision based on his assessment of the national interest.
In the Santos case, the current domestic market and the political and policy sensitivities surrounding specific activities are unlikely to be significant factors. Geopolitical uncertainty and climate change loom large.
Beyond the complexities, it may come down to the judgement of Treasurer Chalmers on the question highlighted by previous Santos chairmen in this masthead.
If he focuses on the consequences of ADNOC’s global interests at some time being inconsistent with Australia’s interests and that there are no conditions that could satisfactorily address that risk, then he should reject the bid. If he considers that Australia’s interests in the Santos activities can be protected through the decisions that the government already has on its policy and regulatory agenda, then, with some constraining conditions, he should approve the bid.