The collapse of the Santos sale has brought into sharp focus a factor often overlooked in Australian deal-making: sovereign risk. For decades, South Australia marketed itself as a stable jurisdiction, open to global capital, resource-rich, and backed by strong rule of law. Yet recent moves by the South Australian Government to seize assets linked to Whyalla Steelworks and the Whyalla port have unsettled that image, raising questions about how investors and lenders perceive risk in the state.
The government’s decision to compulsorily acquire assets at Whyalla, once deemed strategic but privately held, represents more than an industrial policy intervention. It sets a precedent: when government priorities shift, private property rights may be subordinated to perceived “national interest” considerations. While Canberra has long had foreign investment review powers, state-level asset seizure is rarer and therefore more alarming to global investors who rely on predictable, transparent frameworks for large-scale, long-term capital investments.
Implications for Santos and the Energy Sector
Santos, headquartered in Adelaide, is both a flagship of South Australian enterprise and a magnet for international partners. Potential buyers or joint-venture investors must now factor in not only commodity and regulatory risks but also the possibility that critical infrastructure supporting their operations could be reprioritised or nationalised at short notice. For a sector that requires long-term capital commitments, where LNG projects can run for decades, this uncertainty weighs heavily on valuations.
Lenders exposed to Santos or similar energy projects may now demand tighter covenants, shorter maturities, and higher debt margins. Export credit agencies, often crucial in LNG and infrastructure projects, may hesitate if they perceive rising political risk. In extreme cases, the sovereign-risk discount could deter long-tenor financing altogether, pushing projects to rely more heavily on government support.
Capital Flight
Global investors are acutely sensitive to sovereign-risk signals. Funds with mandates in emerging markets expect policy volatility. However, in OECD jurisdictions such as Australia, the premium has always been for stability. The Whyalla intervention undermines that perception, prompting questions: if steel and port assets are deemed strategic today, what prevents energy pipelines or gas terminals from being deemed strategic tomorrow?
Such questions erode investor trust. For private equity, pension funds, and sovereign wealth funds that rely on exit certainty, a deal in South Australia now carries a heightened “political risk discount.” This is not just theoretical; the Santos sale’s unravelling demonstrates how such perceptions can derail multi-billion-dollar transactions.
The Broader Policy Challenge
There is a policy paradox at play. Governments seek to attract global capital to fund infrastructure, the energy transition, and industrial revitalisation; yet heavy-handed interventions, however well-intentioned, risk driving that capital away. South Australia’s handling of Whyalla may resonate far beyond its borders, shaping how international stakeholders view Australia’s reliability as a partner in long-duration assets.
For lenders and investors, the lesson is clear: sovereign risk is no longer confined to developing economies or volatile political climates. It has arrived in South Australia and is now included in the due diligence checklist.
The Santos collapse should not be read simply as a failed transaction. It signals a shifting risk landscape in which governments, under pressure from economic, industrial, and political imperatives, may assert themselves or act in ways that unsettle markets.
Given yesterday’s US-Australia critical-minerals pact to ramp up rare-earth financing and offtake, and renewed AUKUS momentum centred on South Australia, the state’s readiness to legislate ad hoc around “strategic assets” and intervene ex post will prompt investors to hard-wire change-in-law protections and Commonwealth-level dispute forums into their agreements.
This is a potentially dangerous feedback loop: interventions intended to secure strategic industries risk deterring the very capital required to sustain them, and, for South Australia, the challenge is to reassure the world that its interventions are exceptional rather than systemic. Otherwise, Whyalla may become shorthand for sovereign risk in Australia.
