Santos and BG Group’s gas deal

Santos Limited (ASX:STO) has agreed to share gas infrastructure with BG Group, as the oil and gas majors attempt to cut costs.

Santos’ Gladstone LNG project and BG Group’s QCLNG projects will link their major pipelines in central Queensland as well as on Curtis Island, off the coast of Gladstone, to reduce costs and risks. Both multi-billion dollar projects are within hundreds of metres of each other, and a similar distance away from Origin Energy’s (ASX:ORG) Australia Pacific LNG project. All three projects have been criticised for failing to consolidate their operations and cooperate to reduce the giant capital costs.

With all three developing their own infrastructure, this has led to the duplication of infrastructure such as jetties, pipelines, as well as the actual processing plants. Santos boss David Knox is reported to have estimated that each venture could have saved more than $1 billion through consolidation.

The agreement is expected to be the first of many, and will allow both BG Group and Santos to run their LNG plants at maximum efficiency, with the pipeline connections allowing gas to flow from one project to the other when necessary, according to Santos’ Rod Duke. LNG plants are shut down occasionally for planned maintenance.

News reports also suggest BG Group is negotiating similar agreements with Origin and its APLNG project.

Santos’ GLNG project, in which it owns 30%, is expected to come on stream in 2015, while BG Group’s QCLNG is expected to ship its first LNG in 2014. Santos also has a 13.5% share in Oil Search’s (ASX:OSH) PNG LNG project, which is on track for first production in 2014.

While news reports have suggested that US shale gas looms as a threat to Australia’s LNG exports, long-term offtake agreements have already been signed for much of the LNG to be produced.

Foolish takeaway

The deal makes sense, but investors may be wondering why the companies developing three separate LNG plants on a single island off Gladstone didn’t collaborate from the start. At least the companies seem to have acknowledged the need to work together now.

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Motley Fool writer/analyst Mike King owns shares in Santos and Origin.

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