Financial News Agency, December 8 (Editor Zhou Ziyi) - Australia's two largest oil and gas companies may carry out a major merger, which reflects the industry's higher requirements for scale and volume.

According to recent reports, Woodside Energy (Woodside Energy) and Santos (Santos) may merge at a price of 80 billion Australian dollars (52 billion US dollars) to create a leading enterprise in the liquefied natural gas (LNG) industry.

The two companies confirmed on Thursday (December 7) that they have begun negotiations on a potential deal. If completed, the merged entity would unify almost all of Australia's liquefied natural gas industries.

According to a number of people with direct knowledge of the situation, the negotiations were initially triggered by the idea that both companies needed to scale up because the LNG market was seeking consolidation and the risk of developing new projects was increasing, including costs, regulations, and opposition to the industry.

“A reasonable deal”

Citigroup analyst James Byrne said the deal may be reasonable “because Woodside is adjusting its stagnant investment portfolio while Santos is repairing its balance sheet.”

He added that the merger of the two companies would create a large company listed in both the US and Australia and with global connections, and that this move would spread the high risk of some projects.

Alex Froley, a LNG analyst at consulting firm ICIS, said the new company's huge investment portfolio after the merger will enable LNG companies to improve efficiency and exchange vessels internally to save costs.

Felix Booth, head of liquefied natural gas at energy analytics company Vortexa, believes the potential deal “is a major consolidation of the Australian oil and gas industry.” Santos's LNG project in Papua New Guinea will be a clear addition to Woodside's LNG portfolio, and the proposed merger will increase the scale and efficiency of its operations.

Scale-oriented

Frank Harris, head of global LNG consulting at global consulting giant Wood Mackenzie (Wood Mackenzie), said, “LNG is increasingly valuing scale and large investment portfolios. Companies that want to become the world's top suppliers require coordination of scale, and Woodside will realize this.”

From Santos's perspective, since its returns are below the global average, the company has been pressured by investors to re-examine its strategy; the company has also been urged to consider a spin-off or sale. And for a long time, Santos has viewed Woodside as a potential partner.

However, compared to the world's major liquefied natural gas companies, the size of the merged entity is still dwarfed by today's industry giants.

Woodside sold about 11.2 million tons of liquefied fuel in 2022, and Santos sold 5.8 million tons. The merged entity will be on par with British Petroleum, which sold 19 million tons last year.

By contrast, the two largest private LNG suppliers, Shell and Total Energy, sold 66 million tons and 48.1 million tons, respectively.

Potential risks

The deal could present significant risks, such as how to value troubled flagship projects.

Woodside's large-scale Scarborough project off the coast of Western Australia's Pilbara region was delayed due to opposition from indigenous communities; so was Santos's Barossa gas project near the remote Tiwi Islands in the Timor Sea.

And given that the merged entity is likely to dominate the Australian domestic market, the country's regulators may also step in.

Furthermore, the state government of South Australia, where Santos is headquartered, may also oppose this merger because it will oppose any attempt to consolidate operations from South Australia.