Australia's Santos Restarts Reindeer Gas Project with Apache after Signing $585 Million Supply Contract for CITIC Iron Mine

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Researched by Industrial Info Resources (Sugar Land, Texas)--Australia's Santos Limited (ASX:STO) (Adelaide, South Australia) and joint venture partner Apache Corporation (NYSE:APA) (Houston, Texas) recently signed a $585 million contract for the supply of natural gas by to CITIC Pacific's (OTC:CTPCY) (Hong Kong) Sino Iron project. The signing of the contract means that the Reindeer gas project, located in Western Australia, can be brought back on track after being deferred in early December 2008 because of delays in the gas-sales agreement.

The gas will be supplied to the magnetite mining project in Western Australia through a new 105-kilometer offshore pipeline and a new onshore gas-processing facility in Devil Creek, 45 kilometers southwest of Dampier. After the restart of the Reindeer project has been enabled by conditions in the new contract, Santos will supply the Sino Iron project with 2.37 billion cubic meters of gas over a period of seven years, with deliveries starting in the second half of 2011. The Reindeer project will have an overall production capacity of 5.65 million cubic meters of gas per day.

For the first three years, the contract price is fixed with periodic adjustments for changes in the consumer price index. From the beginning of the fourth year, the price will be indexed to international oil prices. Revenue will be denominated in U.S. dollars. Based on an assumed oil price of $50 per barrel, the net share of the expected revenue for Santos over the seven-year contract will be about $585 million.

The Sino Iron mine will enable CITIC Pacific to export about 27 million tons per year of magnetite concentrate and pellet during a mine-life period of 25 years. The mine is one of the largest of its type in the world and is currently under construction at Cape Preston in Western Australia's Pilbara region, with 75% of capital expenditures already committed. The mine is under development and earthworks for the power station and processing plant have been completed. Gas turbines are ready for shipping to the project and other lead-time components are being manufactured.

The China Development Bank has arranged funding after CITIC Pacific lost almost $2 billion after mis-timing currency hedges when buying Euros and Australian dollars in an attempt to minimize currency exposure to the mining project.

Santos, a major oil and gas exploration and production company, is Australia's largest gas producer and has global operations that include liquefied natural gas exports to Japan. CITIC Pacific Mining employs about 500 people in Perth, Cape Preston and China and is a subsidiary of the Beijing-based CITIC Group.

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