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A possible A$80bn ($52bn) merger of two of Australia’s largest oil and gasoline firms to create a nationwide champion in liquefied pure gasoline displays a harsh actuality in the sector: with out global scale, it’s onerous to stay related.

Woodside Energy and Santos mentioned on Thursday they’d opened talks over a possible deal. If accomplished, it could consolidate practically all of Australia’s LNG sector right into a single entity.

Talks are at a really early stage, based on a number of folks with direct information of the state of affairs. They mentioned the discussions had been triggered by the necessity for each firms to extend their measurement because the market appears to consolidate and the chance of creating new tasks will increase resulting from price, regulation and opposition to the trade.

James Byrne, an analyst with Citi, mentioned a deal may very well be justified as “Woodside fixing its stagnating portfolio and Santos fixing its balance sheet”. He mentioned a mixture would create a globally related firm listed in the US and Australia that would unfold the upper danger and declining worth of some tasks.

However, the mixed entity will nonetheless pale in measurement in contrast with main global LNG gamers. Woodside offered about 11.2mn tonnes of the super-chilled gas in 2022 and Santos 5.8mn tonnes. By distinction, Shell and Total Energies, the 2 largest personal LNG suppliers, offered 66mn tonnes and 48.1mn tonnes, respectively. A mixed entity could be similar to BP, which offered 19mn tonnes final 12 months.

“LNG is increasingly about scale and having a large portfolio,” mentioned Frank Harris, head of global LNG consulting at Wood Mackenzie. “People who have aspirations to be top players need scale and Woodside will be aware of that. As the industry gets bigger, to keep up, one could contend that they need more scale.”

Santos has been underneath stress from traders, notably fund supervisor L1 Capital, to assessment its technique because of the firm’s poor returns in contrast with the global common. The firm has been urged to contemplate a break-up of the enterprise or a sale. Woodside has lengthy been seen as a possible companion in the Australian trade.

Santos shares rose 6 per cent to A$7.24 on Friday, whereas Woodside’s fell barely, by 0.7 per cent, to A$29.78.

A deal might come with substantial dangers, together with the right way to worth flagship tasks which have hit issues. Woodside’s large Scarborough challenge off the coast of the Pilbara area in Western Australia has been delayed by opposition from indigenous communities, as has Santos’s Barossa gasoline challenge close to the distant Tiwi Islands in the Timor Sea.

Regulators might additionally demand disposals of home Australian belongings given the possibly dominant place of the mixed entity in its residence market. Both firms depend LNG as their essential product but additionally produce crude oil and pipeline gasoline from their operations.

Santos, which has additionally invested in carbon seize and storage belongings together with the Moomba gasoline plant in South Australia, derived greater than half of its manufacturing from LNG in 2022. Woodside, which has invested in the US oil sector and has change into a rising presence there, beforehand mentioned it anticipated 45 per cent of its manufacturing this 12 months could be from LNG.

There may be an objection from the South Australia authorities, which might struggle towards any try and consolidate the enterprise away from Adelaide. Santos — which stands for South Australia Northern Territory Oil Search — has been headquartered there for the reason that Nineteen Fifties, however Woodside relies in Perth.

A mixture would convey collectively belongings on each of Australia’s coasts but additionally develop the worldwide presence, with the brand new group having belongings in Alaska, Senegal and Papua New Guinea.

Russia’s invasion of Ukraine has made LNG buying and selling extraordinarily advanced, with the slashing of pipelines leaving Europe to look elsewhere for gasoline provides to satisfy its wants. Europe and Asia now more and more compete for a similar provide, with merchants and suppliers continually having to determine the place to ship their cargo to make the perfect returns.

A big portfolio permits LNG firms to “find efficiencies and swap vessels around internally for [cost] savings without even having to find a partner to trade with”, mentioned Alex Froley, LNG analyst at consultancy ICIS.

The potential deal “is a significant consolidation play in the Australian oil and gas industry”, mentioned Felix Booth, head of LNG at vitality analytics agency Vortexa. Santos’s LNG challenge in Papua New Guinea “will be a notable addition” to Woodside’s LNG portfolio and the mooted merger would convey improved scale and effectivity to their operations, he mentioned.

In latest years, Woodside has additionally tried to broaden its global footprint by signing LNG offers in North America. It has agreements with US LNG producers for long-term provides and this week introduced a 20-year LNG deal with a challenge in Mexico.

Woodside is “focused” on the expansion of its LNG portfolio, Mark Abbotsford, government vice-president of selling and buying and selling, mentioned in a LinkedIn put up after Woodside introduced the Mexico deal.

“We see scale, geographical diversity and cost-competitive LNG as being critical to our future and also essential to meet continued growth in gas/LNG demand through the energy transition,” he mentioned.