ADNOC’s $18.7B bid for Santos signals UAE’s bold LNG expansion, backed by ADQ and Carlyle

Abu Dhabi National Oil Company (ADNOC), through its burgeoning investment vehicle XRG, has launched a formidable $18.7 billion all-cash proposal to acquire Australia’s second-largest gas producer, Santos. This audacious move, backed by a powerful consortium including Abu Dhabi Development Holding Company (ADQ) and global private equity giant Carlyle, signals a profound push by the UAE energy behemoth to establish a dominant presence in the global liquefied natural gas (LNG) market. While the deal promises a substantial premium for Santos shareholders, its path to completion is fraught with complex regulatory hurdles across multiple jurisdictions.

The indicative offer, valuing Santos shares at 8.89) each, represents a significant 28% premium over the Australian company’s closing price on the preceding Friday. When factoring in net debt, the proposed transaction swells to an enterprise value of A$36.4 billion, positioning it as potentially the largest all-cash corporate buyout in Australia’s history and the third-largest takeover overall. This sheer scale underscores the strategic importance both parties attach to this potential merger.

The Power Play: ADNOC’s Global LNG Ambitions

At the heart of this colossal bid lies ADNOC’s clear and ambitious strategy: to rapidly expand its global gas and LNG footprint. Through XRG, its dedicated international investment arm launched in November, ADNOC aims to cultivate a top-five integrated global gas and LNG business with an impressive capacity of between 20 million and 25 million metric tons per annum (MMtpa) by 2035. This target is not merely aspirational; it is supported by a comprehensive five-year plan (2025-2030) approved by XRG’s board, signaling a strategic pivot towards gas as a critical component of the future energy mix.

XRG’s establishment as a lower-carbon energy and chemicals investment company with an enterprise value exceeding $80 billion highlights ADNOC’s broader vision to diversify its portfolio, capitalize on energy transition opportunities, and leverage advancements in artificial intelligence and the growth of emerging economies. The acquisition of Santos would be a monumental leap forward in achieving XRG’s stated goal of doubling its asset value over the next decade.

The consortium’s composition adds layers of financial and strategic muscle to the bid. Abu Dhabi Development Holding Company (ADQ), a prominent sovereign investor, manages a highly integrated portfolio across the entire energy and utilities value chain, focusing on critical infrastructure and global supply chains. ADQ’s involvement underscores a national strategic interest from Abu Dhabi in securing robust energy assets globally. Meanwhile, The Carlyle Group, a global private equity firm, brings extensive experience in energy sector investments, including recent forays into clean energy infrastructure through platforms like Revera Energy in Australia and the UK, focusing on battery storage, renewable power, and green hydrogen. While Carlyle has been actively investing in the energy transition, its participation in a deal for a major gas producer like Santos highlights the continued role of natural gas as a transitional fuel in the global energy landscape. Their combined financial prowess and strategic insights make this consortium a formidable force.

XRG has already demonstrated its aggressive expansion strategy with several notable acquisitions preceding the Santos bid. These include a 38% stake in the Block I gas and condensate fields on Turkmenistan’s side of the Caspian Sea and LNG interests in Mozambique’s prolific Rovuma Basin, which offers access to pioneering LNG projects with a combined potential production capacity of over 25 MMtpa. Furthermore, ADNOC’s existing investments in the Rio Grande LNG export facility in Texas, USA, and a joint venture with BP PLC for gas production in Egypt (Arcius Energy) illustrate a clear, consistent pattern of building a diversified global gas portfolio. As Kaushal Ramesh, Vice President, Gas & LNG Research, at Rystad Energy, aptly points out, “What ADNOC really wants is the LNG assets, since they are inside the Asia Pacific basin. Since their plan is to expand in LNG, they will want assets close to where the future of demand lies.” This focus on the Asia Pacific region, a rapidly growing market for LNG, is a key driver for the Santos acquisition.

Santos: A Coveted Portfolio of Gas and LNG Assets

Santos, with its significant and diverse portfolio of oil and gas assets, presents an attractive target for any entity seeking to scale its energy operations. The company’s crown jewels, and undoubtedly the primary draw for the XRG-led consortium, are its liquefied natural gas (LNG) operations. These include the Gladstone LNG project on Australia’s east coast, a crucial facility for converting coal seam gas into LNG for export, and the Darwin LNG facility in the north, which processes gas from offshore fields.

Beyond Australia, Santos holds substantial stakes in Papua New Guinea’s highly regarded LNG sector, notably the operational PNG LNG project and the undeveloped Papua LNG project. These PNG interests are widely considered Santos’ most prized assets, given their strategic location relative to key Asian markets and their significant production potential. Last year alone, Santos sold 5.08 million tons of LNG, with more than 60% originating from Papua New Guinea, highlighting the critical role these assets play in its overall output. The acquisition of these assets would grant ADNOC direct access to established supply chains and high-growth markets in the Asia Pacific.

In addition to its gas and LNG holdings, Santos is also actively developing the Pikka oil project in Alaska, which is slated to commence production in mid-2026. This project adds an important dimension to Santos’ asset base, providing crude oil production capacity in a geopolitically stable region, further diversifying the appeal of the company to a prospective buyer.

Despite its valuable assets, Santos has faced financial headwinds. In February, the company reported a nearly 16% fall in underlying annual profit for 2024 and subsequently cut its dividend by 41%. This financial performance, coupled with a history of being a takeover target, may have made the company more receptive to a compelling offer. Notably, Santos had previously rejected a $10.8 billion offer from private equity-backed Harbour Energy in 2018, citing valuation concerns.

The Geopolitical Undercurrents: Oil Prices and Energy Security

The timing of ADNOC’s bid for Santos is not coincidental. It emerges as global oil prices have reached multi-week highs, largely fuelled by escalating geopolitical tensions in the Middle East. Recent exchanges of air strikes between Israel and Iran have ignited widespread concerns about potential disruptions to oil exports from the region, especially impacting critical maritime routes like the Strait of Hormuz, through which a significant portion of the world’s seaborne oil passes. Reports of an Israeli strike on Iran’s South Pars gas field in the Persian Gulf, the world’s largest natural gas field, further underscore the volatility and the immediate impact on global energy markets.

This backdrop of heightened energy insecurity amplifies the strategic value of stable and diversified energy supplies. For major energy players like ADNOC, securing assets in regions with established production and export infrastructure, outside of immediate geopolitical flashpoints, becomes paramount. Australia and Papua New Guinea, while having their own regulatory complexities, offer a degree of geopolitical stability that is highly attractive in the current global climate. Acquiring Santos would provide ADNOC with access to reliable LNG volumes and strengthen its position in a market increasingly prioritising security of supply.

A Calculated Premium: Market Reaction and Analyst Insights

The market’s immediate reaction to the ADNOC-led consortium’s bid was predictable yet telling. Santos shares surged 15% in early trading, reaching A7.86,beforesettlingslightlyloweratA7.81 mid-session. Despite this significant jump, the stock traded noticeably below the offer price of A$8.89. This discount reflects the market’s assessment of the substantial risks involved in securing regulatory approvals for such a large and strategically sensitive transaction.

Analysts have been quick to weigh in on the implications. Kaushal Ramesh of Rystad Energy reiterated that for ADNOC, this acquisition aligns perfectly with their aggressive growth plans, particularly their desire for LNG assets within the Asia Pacific basin, which is seen as the future hub of demand. This perspective highlights the long-term, strategic nature of ADNOC’s investment, moving beyond immediate market fluctuations to secure future growth.

Saul Kavonic, a senior energy analyst at MST Marquee and a well-respected voice in the Australian energy sector, echoed the sentiment regarding regulatory challenges, stating that approval from Australia’s Foreign Investment Review Board (FIRB) “may be a major risk to the deal.” He also noted the unlikelihood of a competing bid, arguing that “only ADNOC may be willing to pay such a premium to realise their global LNG ambitions.” This suggests that the premium offered is less about Santos’s current valuation in a competitive bidding scenario and more about ADNOC’s unique strategic imperative to rapidly expand its global LNG capabilities and secure a strong foothold in the Asia-Pacific market.

Navigating the Regulatory Labyrinth: A Major Hurdle

Perhaps the most significant challenge facing the ADNOC-led consortium is securing the myriad of regulatory approvals required across multiple jurisdictions. The sheer number and complexity of these approvals are a major reason for the market’s cautious reaction, with Santos shares trading below the offer price.

Australia’s Foreign Investment Review Board (FIRB)

In Australia, any foreign acquisition of significant assets is subject to scrutiny by the Foreign Investment Review Board (FIRB). FIRB advises the Treasurer, who ultimately decides whether a foreign investment is contrary to Australia’s “national interest.” Given Santos’ control over critical energy infrastructure, such as the Moomba Gas Plant and the Darwin LNG facility, the FIRB review will be exceptionally rigorous. Australia has a strong history of protecting its national interest, particularly concerning essential services and strategic resources. The government has indicated that investments in critical infrastructure, critical minerals, and critical technology will face greater scrutiny to protect the national interest. While the framework generally operates on a “negative test” (presuming approval unless contrary to national interest), the strategic importance of gas to Australia’s energy security and economy will ensure a deep dive into the deal’s implications for domestic energy supply, competition, and employment.

Beyond FIRB, approval from the National Offshore Petroleum Titles Administrator (NOPTA) is also required. NOPTA oversees the administration of offshore petroleum titles in Commonwealth waters. ADNOC will need to apply for the transfer of Santos’ offshore petroleum titles and demonstrate its technical and financial capacity to operate these complex projects while complying with existing environmental and safety regulations. The expertise and track record of the acquiring entities in managing such large-scale operations will be key considerations.

ADNOC’s consortium has attempted to pre-empt some regulatory concerns by committing to maintain Santos’ headquarters in South Australia. This move aims to appease local sentiments and signal a commitment to local employment and community engagement, a factor often considered in national interest assessments. However, as analyst Saul Kavonic highlighted, any potential spin-off of domestic infrastructure assets to satisfy regulators would be difficult, primarily because these assets are often burdened with significant decommissioning costs, making them less attractive as standalone entities.

Papua New Guinea (PNG) Regulatory Bodies

Papua New Guinea plays a crucial role in Santos’ portfolio, with PNG LNG and the undeveloped Papua LNG being among its most valuable assets. Consequently, the deal will require extensive approvals from several PNG regulatory bodies, including:

• PNG Securities Commission: Responsible for regulating the securities market and ensuring fair practices.
• PNG Independent Consumer and Competition Commission (ICCC): Focused on competition issues and ensuring that the acquisition does not lead to a reduction in competition or adverse outcomes for consumers.
• PNG Government: The government itself will have a significant say, driven by national interest considerations, particularly regarding foreign ownership of key energy assets, employment opportunities for local citizens, and the distribution of economic benefits. PNG officials have previously demonstrated a willingness to scrutinize such deals, as seen during the merger of Santos and Oil Search, where concerns over national interest, employment, and revenue distribution were thoroughly examined. ADNOC will need to demonstrate a clear commitment to PNG’s economic development and adherence to local regulations to secure these vital approvals.

Committee on Foreign Investment in the United States (CFIUS)

While perhaps less immediately obvious, the deal also requires approval from the Committee on Foreign Investment in the United States (CFIUS). This is primarily due to Santos’ involvement in the Pikka oil project in Alaska and ADNOC’s existing interests in U.S. energy infrastructure, such as the Rio Grande LNG export facility. CFIUS is an interagency body chaired by the Secretary of the Treasury that reviews foreign investments in the U.S. economy for potential national security risks. Its jurisdiction extends to mergers, acquisitions, and takeovers that could result in foreign control of a U.S. business, as well as non-controlling investments in businesses involved in “critical technologies, critical infrastructure, or sensitive personal data” (known as “TID U.S. businesses”).

Given that the Pikka project constitutes critical energy infrastructure within the U.S., and ADNOC is a foreign government-controlled entity, CFIUS review is a necessary and potentially complex step. The committee can recommend that the President suspend or prohibit transactions that threaten U.S. national security, or impose mitigation conditions to address concerns. This adds another layer of scrutiny and potential delay to the overall transaction timeline.

The Path Not Taken: Woodside Merger and Future Prospects

The ADNOC-Santos deal comes on the heels of previous attempts by Santos to bolster its market position. Notably, late last year, talks between Santos and its larger Australian rival Woodside Energy to create a potential A$80 billion oil and gas giant collapsed. Santos walked away from those discussions, citing disagreements over valuation as a key factor and expressing its intent to explore alternative avenues to enhance shareholder value. The failure of the Woodside merger underscores the challenge of aligning the interests and valuations of major energy players in a dynamic market.

The current premium offered by the ADNOC-led consortium, coupled with the strategic imperative for ADNOC to rapidly expand its global LNG presence, makes a competing bid “very unlikely,” according to market analysts. The unique confluence of ADNOC’s aggressive expansion strategy, its financial capacity, and its long-term view of LNG demand in Asia Pacific creates a scenario where few, if any, other players would be willing or able to match such a premium.

If successful, the acquisition of Santos by the ADNOC-led consortium would not only reshape the Australian energy landscape but also significantly alter the global LNG market. It would firmly establish ADNOC as a major integrated player in the international gas trade, particularly in the strategically vital Asia Pacific region. However, the path to realising this ambition is long and winding, with regulatory bodies in Australia, Papua New Guinea, and the United States holding the ultimate power to approve or derail what could become one of the most significant energy deals of the decade. The coming months will be critical as the consortium navigates these complex approvals, watched closely by an industry keen to see how this ambitious power play unfolds.

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By: Montel Kamau

Serrari Financial Analyst

16th June, 2025