Santos, Shell in talks over Gladstone LNG project .

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ROYAL Dutch/Shell has entered the bidding for a strategic stake in the Santos-led Gladstone Liquefied Natural Gas project.

The deal could be a precursor to a larger industry consolidation.
Shell is competing with Korea Gas and Sinopec to purchase a stake of between 9 per cent and 20 per cent in GLNG that could be worth as much as $1 billion.
However, a deal with Shell is expected to lead to a merger of GLNG and the rival Arrow coal seam gas-to-LNG project, which is being acquired for $3.5bn by a Shell/PetroChina joint venture.
The Australian has confirmed that Deutsche Bank-advised Santos and Shell are in talks.
Sources last night stressed there was no certainty of a deal and the process remained in the stage of "negotiations" rather than an agreement. Talks with Sinopec were also ongoing, they said.
The proposal is believed to potentially involve the merger of the two projects on Curtis Island, with Shell assuming the role of operator of the combined facility.
PetroChina could also play a role, including entering into further forward LNG sales purchases.
GLNG is a 60-40 joint venture with Malaysia's Petronas, a company that has strong historical and ongoing links with the Anglo-Dutch energy multinational (Shell operates LNG terminals on behalf of Petronas in Malaysia).
Santos currently has sufficient forward sales to justify a single 3.6 million tonne per annum LNG export facility. But its chief executive David Knox has been under pressure to stitch up sales to support a second train, which would lift capacity to 7-8mtpa, and improve project returns through scale.
Shell is believed to have approached Santos after the Adelaide-based group publically stated its desire to sell down at least 9 per cent in GLNG and The Australian revealed that the Nomura-advised Sinopec was in talks to buy that interest. The Arrow project was planning to build up to four LNG processing trains of about 4 million tonnes per annum, while GLNG planned two trains of about 3.6Mtpa each. Combining the two would save billions of dollars in capital expenditure and create labour and equipment synergies.
With rising capital costs to build the LNG conversion facility on Curtis Island, the market has been concerned that Knox would tap shareholders again in a dilutive multi-billion-dollar capital raising.
It raised $3bn in June last year at $12.50 a share. The stock closed yesterday at $12.76, and shareholders would not be thrilled with another rights issue, probably closer to $10 a share.
A deal between the parties may lead to a similar pairing between the two other Queensland LNG proponents, OriginEnergy/ConocoPhillips's Asia Pacific LNG project and BG Group's QCLNG project. The Bligh government prefers a reduced number of larger LNG projects.
A Santos spokesman said it was "company policy not to comment on market speculation".