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UPDATE 2-Santos, Oil Search agree to merge despite scrutiny in Papua New Guinea

* The A$8 bln takeover bid raises PNG national interest concern

* Santos’ $115 mln cost-savings target below expectations

* Oil Search shares jump 2.7%, Santos up 1% (Adds analyst comment, details and share price reaction)

Sept 10 (Reuters) - Santos sealed an agreement to buy Oil Search to create a global top 20 oil and gas company, the companies said on Friday, even as the Papua New Guinea government raised concerns that a takeover could harm national interests.

The deal will make Australia’s Santos the largest shareholder in the country’s biggest resource project, the PNG LNG project, operated by Exxon Mobil Corp.

The all-share deal, which values PNG-focused Oil Search at about A$8 billion ($6 billion) and would give Oil Search shareholders a 38.5% stake in the merged group, requires approval from a Papua New Guinea court and Oil Search shareholders.

Deputy Prime Minister Samuel Basil warned this deal would harm the national interest as a merger could potentially lead to job losses, a foreign company owning too much of domestic oil and gas resources, and a delisting of Oil Search, which makes up 31% of the country’s stock market.

“With all of Oil Search’s oil and gas field portfolio in PNG under an Australian company, there is the real risk of capital erosion,” Basil said in a statement late Thursday.

Santos said the merger would better align stakeholdings in Papua New Guinea’s biggest gas projects - PNG LNG and Papua LNG - that would further support investment and deliver new jobs.

“We see the PNG government could withhold approvals in an attempt to extract further value from the merger,” Credit Suisse analyst Saul Kavonic said, but added that he does not expect the PNG government to block the deal.

Santos said it expects to reap up to $115 million in pre-tax cost savings from the deal, less than the $150 million some analysts had estimated would be needed to justify the premium the company was offering for Oil Search.

The market’s reaction reflected that view, with investors pushing Oil Search’s shares up 2.7% while Santos rose 1%.

Santos Chief Executive Kevin Gallagher has said creating a A$21 billion company with strong cashflows will help the enlarged group weather the energy transition better, helping it grow and invest to meet a net-zero carbon target by 2040.

On similar grounds, Woodside Petroleum proposed a $29 billion merger in August with the petroleum arm of the world’s biggest-listed miner, BHP Group.

$1=1.3546 Australian dollars Reporting by Nikhil Kurian Nainan in Bengaluru and Sonali Paul in Melbourne, Editing by Sherry Jacob-Phillips

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