UPDATE: Kogas To Buy 10% Of Santos, Petronas LNG Project -Source

Korea Gas Corp. (036460.SE), the world's largest liquefied natural gas importer, is poised to acquire around 10% of a A$15 billion LNG project being built by Australia's Santos Ltd. (STO.AU) and Malaysia's Petroliam Nasional Bhd. (PET.YY), a person with direct knowledge of the matter said Friday.

Santos said Thursday that it wants to sell down a 15% stake in the project, from its current 60% interest, so a 5% stake in the massive terminal may still be up for grabs.

The project is one of four attempting to turn coal seam gas into LNG for export from the port of Gladstone in Australia's Queensland state. Rival ventures are proposed by BG Group PLC (BG.LN), a joint venture between Royal Dutch Shell PLC (RDSB.LN) and PetroChina Co. (PTR), and another joint venture between ConocoPhillips (COP) and Australia's Origin Energy Ltd. (ORG.AU).

An unconventional fuel, coal seam gas has a slightly lower calorific value than traditional natural gas so a deal with a traditional LNG buyer like Kogas would be a big win for Queensland's budding coal seam gas sector.

It wouldn't, however, be the first, with BG having already agreed to sell LNG from its project to Tokyo Gas Co. (TKGSY) and China National Offshore Oil Corp.

The person said that Kogas is in the final stage of talks with project operator Santos to purchase more than 2 million tons a year of LNG, as well as an equity stake, and said that a deal will be announced next month.

China's Sinopec Corp. has previously confirmed that it's held talks with Santos.

Any customer and equity deal would improve Santos and Petroliam Nasional's, or Petronas, chances of meeting their goal of sanctioning construction of their first 3.5 million metric ton capacity LNG production unit by the end of 2010, and an expansion to two units by the end of 2011.

Santos said Thursday that the offtake negotiations it is holding cover both LNG production units, also known as trains. A deal would come despite some analysts' concerns that customers could be deterred by the fact that Santos hasn't yet proven up enough certified gas reserves to support a two-train development.

Santos and BG's ventures have both received environmental approval from Queensland's state government and are awaiting the Australian federal government's approval, expected within months.

They are considered by analysts to be ahead of the pack at Gladstone because they've already signed at least one customer and obtained state regulatory approvals.

Santos and Petronas has already agreed to sell up to 3 million tons a year of LNG from the project back to Petronas.

They want to ship their first LNG in 2014.

A cost estimate of the project will be provided when a final investment decision is made. Analysts expect a two-train development will cost about A$15 billion to build.

Any buyer would have to fund its share of the project's construction. Recent analyst reports have estimated that a 20% stake in the project could be sold for around A$800 million-A$1 billion, suggesting Kogas could be looking at a purchase price closer to A$400 million-A$500 million for a 10% interest.

-By Kyong-Ae Choi and Ross Kelly, Dow Jones Newswires; 822-3700-1903; [e-mail]