HGO Hillgrove Resources Limited

Santos Ltd. (STO.AU), Australia's third-largest oil and gas producer, said Thursday it will spend A$476 million to acquire more acreage in the Gunnedah Basin for coal seam gas generation.

Santos is racing with U.K.-based rival BG Group PLC (BG.LN) to develop coal seam gas reserves in eastern Australia for processing into liquefied natural gas for export.

Adelaide-based Santos said in a statement that it will buy a 35% interest in various exploration permits and production areas operated by Eastern Star Gas Ltd. (ESG.AU) in the Gunnedah Basin, in northern New South Wales state, for A$300 million from unlisted Gastar Exploration Ltd.

The company will also acquire a 19.99% stake in ESG from Hillgrove Resources Ltd. (HGO.AU) for A$176 million, Santos said.

Santos said the transaction builds on the two companies' presence in the region and will accelerate its development for gas supply, power generation and LNG options.

A combination of the two companies' permits in the basin will cover an area of about 63,000 square kilometers with a potential gas resource of more than 50 trillion cubic feet, the company said.

The consideration being paid to Gastar equates to A$0.66 a gigajoule of current proven, probable, possible or 3P reserves. Santos may pay a further A$20 million to Gastar if ESG meets certain reserve targets by Dec. 31.

The payment for the ESG stake equates to A$1.00 a share, compared with ESG stock closing Thursday at 80.5 cents.

Santos also may make an extra payment to Hillgrove if it or a third party buys an interest of more than 50% in ESG at a price of more than A$1 a share within 18 months of Santos' purchase of Hillgrove's interest in ESG, it said.

-By Andrew Harrison, Dow Jones Newswires; 61-3-9292-2095; andrew.harrison@dowjones.com

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