The too-quiet achiever

The unexpected retirement of long-serving Santos chief executive John Ellice-Flint appears to relate more to concerns about his suitability for the period ahead than any adverse judgement on the quality of his seven-year tenure.

Indeed, the Santos board was effusive in its praise for Ellice-Flint's stewardship. When he joined the company in 2000 it produced about 19 million barrels of oil equivalent and its production and reserves were declining. This year it will produce almost 60 million barrels and there has been a massive increase in Santos' reserves and geographic presence.

Then Santos was still largely, indeed almost entirely, focused on its Cooper Basin operations; today it has exposure to most of the northern onshore and offshore gas provinces, including a strategic position in coal seam methane and a strengthening exploration presence throughout Asia. Even the Cooper Basin reserve base has been significantly increased.

Thus Santos chairman Stephen Gerlach wasn't being gratuitously generous to a jettisoned chief executive when he referred to the transformation of Santos' reserves position and operations under Ellice-Flint, which he said underwrote a "very promising" long-term growth outlook.

The problem for Santos, however, is that while Ellice-Flint has positioned the company well for the long term – he is sometimes referred to as "visionary," – he hasn't been able to excite the market or deliver improvements in near-term profitability consistent with the booming industry settings.

Santos has two challenges approaching it. One is the imminent abolition of the 15 per cent cap on shareholdings that has protected the company since it was introduced by the South Australian Government to stymie Alan Bond in 1979. The other is the $7 billion Gladstone LNG project, based on Santos' Queensland coal seam methane reserves, where first production is scheduled for 2014.

The removal of the cap will create vulnerability even as the development of the Gladstone project increases the group's strategic value.

It would have been clear to the Santos board that it was most unlikely, indeed inconceivable, that Ellice-Flint would be able to see the project through to completion, which would have meant a 14 or 15-year term as CEO. Having come to that conclusion, and with some critical decisions looming, on Gladstone in particular, it made sense to put in place a CEO who would be able to take responsibility for the outcomes.

It would also have been apparent that Santos needed a CEO who could engage with the market in the short term to reduce the risk that the market would undervalue the group's longer term prospects when the cap is lifted towards the end of this year.

The Gladstone project has substantial latent value, particularly as it could be expanded beyond one LNG train. Santos' plan to introduce a partner to the project is probably the new CEO's priority – not only because it could introduce technical expertise and credibility but because the terms of entry would help the market get a better understanding of the project's value.

While Ellice-Flint has his supporters in the market, he has also had his detractors, impatient with Santos' inability to deliver in the near term and confused about its longer term positioning and strategies.

Santos' initial plunge into coal seam methane, for instance, surprised and confused the market. It has subsequently been vindicated by events, including the recent $870 million alliance between Queensland Gas Company and Britain's BG Group that could see them develop an LNG plant of their own in Queensland based on QGC's coal seam methane reserves.

Nevertheless, one could conclude that under Ellice-Flint Santos hasn't been the most effective communicator with the market.

Happily for Santos, Ellice-Flint had already identified his successor, David Knox. Knox, Santos' executive vice-president for growth businesses, had extensive and varied experiences with BP, Shell and Arco before Ellice-Flint recruited him to Santos last September.

It is apparent that Knox has already impressed his board, which named him acting CEO immediately rather than leaving Ellice-Flint in place while it conducted an international search for his successor.

Knox is regarded as a near-certainty to retain the role that he is performing on an acting basis until the search is completed. It is a sign of the board's confidence in him that his ability to manage the group won't be fettered in any way despite the decision to conduct the international search.