Santos Faces Twin Squeeze as Gas Export Tax Threat Meets Collapsed Takeover

Santos Faces Twin Squeeze as Gas Export Tax Threat Meets Collapsed Takeover Australia's largest gas supplier navigates political risk from a proposed 25% export levy while growth projects track toward a 30% production increase by 2027. Santos's CEO said Australia's reputation as a stable destination for energy investment has been damaged by a proposal to impose a 25% gas-export tax. The statement lands at a difficult moment for Australia's biggest natural gas supplier, which is simultaneously managing the fallout from a collapsed $18.72 billion takeover bid and preparing to bring two major growth projects online.^2,3 The gas reservation question matters because Santos operates GLNG, one of three LNG export facilities on Curtis Island in Queensland. A tightened reservation policy or export tax would directly affect the economics of shipping Australian gas to Asian buyers. Santos has built its business model around the assumption that Queensland coal seam gas can be liquefied and exported at global prices. A mandatory domestic reservation or export levy changes that assumption.⁶ The political sensitivity around domestic gas supply and pricing was already visible in the regulatory scrutiny that helped kill the XRG takeover. Abu Dhabi's National Oil Company-led XRG consortium offered $5.76 per share, a 27.73% premium to Santos's closing price of AUD 6.96. Morningstar had given the bid a 50% chance of succeeding, with doubt centred on regulatory approvals. The bid collapsed. Shares plunged more than 10%.^3,1 With the takeover dead, Morningstar raised its fair value estimate for Santos by 9% to AUD 10.50, reflecting the stand-alone business and its growth potential. The analysts also lifted their stand-alone fair value by 5% after raising their midcycle Brent price forecast by USD 5 to USD 65 per barrel. At a recent quote of about AUD 7.89, the stock trades at a significant discount to that target.^1,5 The growth pipeline is real. Projects expected to deliver a 30% increase in production by 2027 are tracking to plan. First gas from the Barossa offshore project in northern Australia is slated for the current quarter. Pikka, Santos's Alaska development, is 90% complete. The company also approved the Agogo tie-in project in Papua New Guinea through its 39.9% stake in the PNG LNG joint venture.^1,2 But Santos reported a 1.8% drop in first-quarter sales revenue, hurt by a temporary outage at Barossa and a severe tropical cyclone on Australia's west coast. Full-year 2025 revenue was $4.94 billion, down 8.21% from the prior year's $5.38 billion. Earnings fell 33.17% to $818 million. The balance sheet remains conservative — gearing at 26% and net debt to EBITDA of 1.3 — giving the company room to fund growth without external capital.^2,1 The gas reservation debate sits at the intersection of Santos's growth plans and Australian energy politics. Santos's earlier production guidance for 2023 had already been cut to between 91 million and 98 million barrels of oil equivalent, down from 103 million, alongside a major restructure. The company has been through cycles of resizing before. What it has not faced is a structural policy intervention that caps the revenue it can earn on exported molecules.⁴ XRG's interest in Santos reflected the strategic value of Australian gas assets. The Abu Dhabi-backed firm, with an enterprise value exceeding $80 billion, has been acquiring positions in natural gas, chemicals, and lower-carbon energy. That it could not get regulatory clearance for a premium bid tells Santos's management something about the political environment in which they operate.³ Santos is Australia's biggest supplier of natural gas, with LNG, pipeline gas, and oil assets across the Cooper Basin, Queensland, New South Wales, Papua New Guinea, Northern Australia, Timor-Leste, Western Australia, and Alaska. The company was incorporated in 1954, and its name stands for South Australia and Northern Territory Oil Search. The breadth of the portfolio provides diversification, but the Queensland LNG exposure is where the gas reservation policy bites hardest.⁶ The signal to watch is whether the proposed 25% export tax advances through parliament or gets diluted before it reaches Santos's operating margins. Barossa's first gas this quarter will test whether the market prices Santos on its growth trajectory or on the political risk discount that killed the XRG deal and now threatens to cap LNG export returns.^2,1