Abu Dhabi’s ADNOC-led consortium, known as XRG, has formally withdrawn its indicative $19 billion proposal to acquire Santos, one of Australia’s largest oil and gas producers. This decision ends months of speculation over what could have been one of Australia’s largest energy sector deals.
The consortium, which includes Abu Dhabi’s sovereign wealth fund ADQ and the US private equity firm Carlyle Group, announced on September 17 that it would not advance to a binding acquisition following extended and difficult negotiations.
In a statement, XRG said:
“Following a comprehensive evaluation and considering all commercial factors and the Scheme Implementation Agreement (SIA) terms required by Santos’ board, the consortium has determined it will not proceed with the transaction.”
Negotiation Breakdown: Valuation, Tax, and Regulatory Risks
Sources close to the deal described to media outlets that the consortium and Santos’ board diverged on several critical issues, including valuation and deal structuring. Mismatched expectations and concerns over extended timeframes to completion further complicated talks.
Analysts and insiders highlighted several sticking points:
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Valuation Gap: The initial indicative price offered by XRG in June was US$5.76 (A$8.89) per share, representing a 28% premium over Santos’ closing price that day. Despite this, Santos shares failed to sustain a rise, consistently trading below the offer price amid skepticism from investors about the bid’s likelihood and regulatory hurdles.
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Capital Gains Tax Liabilities: Unanticipated tax obligations relating to asset sales weighed heavily on consortium economics. These liabilities, only fully understood late in negotiations, added complexity to valuation assessments.
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Regulatory and Risk-Sharing Disputes: Santos emphasized the need for a fair allocation of regulatory risk and commitment to developing domestic gas supply, crucial for Australia’s energy security. The consortium reportedly resisted some of these risk-sharing mechanisms and obligations.
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Environmental Concerns: A methane leak at Darwin LNG, a major Santos asset, was disclosed publicly mid-negotiations through media, not formal due diligence. This heightened scrutiny increased perceived operational risk.
Santos’ Stance and Shareholder Protection
Santos maintained it was prepared to enter a binding Scheme Implementation Agreement at the original offer price, contingent on acceptable commercial terms.
Chairman Keith Spence stated:
“The Santos board expressed concerns over delays in agreeing the SIA and said the consortium would not accept terms that protected value for Santos shareholders, especially given extended timeframes and regulatory risks.”
Santos CEO Kevin Gallagher provided insights into the company’s ongoing strategy and outlook:
“The last three or four years have been challenging for Santos. We faced significant impacts during COVID and have been in a heavy investment phase from 2022 to now, which has held down our stock price. That’s just part of business.”
“Barossa gas is due to start up at Darwin LNG very soon, and Pikka oil in Alaska is scheduled for 2026. These projects will lift output by 30% by 2027. We have a strong and growing asset portfolio.”
“We’re not in the process of selling. The interest in Santos stems from the strength of our portfolio and value creation potential. We remain focused on strategic growth.”
Market Reaction and Investor Sentiment
The announcement sent Santos shares down nearly 12% in Sydney trading, closing well below the consortium’s offer price. Market analysts dissected the bid’s collapse as a signal of underlying valuation and risk concerns.
Investor wariness had been apparent since the initial bid, with share prices reflecting doubts over regulatory approvals and geopolitical complications.
Financial analyst Naomi Jenkins told media:
“This deal’s collapse underscores the increasingly complex environment for large energy asset transactions. Between regulatory scrutiny, geopolitical uncertainty, and environmental liabilities, buyers face mounting risks.”
Context of Failed Takeover Attempts
This withdrawal marks at least the third major failed bid for Santos in recent years. Earlier suitors including Woodside Energy called off merger talks in 2024, illustrating persistent challenges for consolidation in Australia’s energy sector.
The failed attempts reflect Australia’s stringent foreign investment screening, domestic gas supply concerns, and evolving investor appetites amid global energy transition pressures.
Broader Impact on Abu Dhabi’s Strategy
XRG was created as ADNOC’s international investment arm with a mandate to acquire strategic energy and chemical assets globally. The aborted Santos deal raises questions about ADNOC’s ability to expand offshore amidst complex commercial, political, and environmental landscapes.
A senior energy sector source said:
“The Santos bid was a cornerstone for ADNOC’s expansion strategy. Its failure may lead to recalibrations of how aggressively ADNOC pursues acquisitions in challenging jurisdictions like Australia.”
Forward Outlook for Santos
Despite the setback, Santos continues to advance critical projects expected to transform its production profile. The Barossa gas field’s upcoming start-up and Pikka oil development in Alaska are anticipated to boost output and cash flow substantially over the next few years.
Financial discipline remains a focus, with Santos seeking to optimize capital allocation, reduce costs, and enhance shareholder returns amidst volatile commodity pricing.
Environmental and Operational Challenges
The methane leak at Darwin LNG represents a substantial environmental and reputational risk, requiring ongoing mitigation efforts. The incident’s late discovery by potential buyers highlights the challenges of transparent operational disclosure in complex energy assets.
Regulators and stakeholders in Australia are increasingly scrutinizing such environmental risks, adding pressure on operators like Santos to maintain high standards.
A Deal That Exposed Industry Complexities
The withdrawal of the Abu Dhabi-led consortium’s $19 billion bid for Santos exposes the multifaceted complexities of large-scale energy transactions today. Valuation disparities, regulatory hurdles, tax implications, environmental exposure, and geopolitical factors intertwined to derail a deal that once promised to reshape Australia’s LNG landscape.
For Santos, the focus shifts back to executing its growth strategy and managing operational risks while maintaining investor confidence.
For investors and energy markets, the episode serves as a lesson on the delicate balance between ambition and commercial reality in a world moving toward cleaner energy and tighter regulation.
