UPDATE 1-Santos to sell Australia LNG to Petronas

* Santos says to sell 2 mtpa of LNG to Petronas for 20 years

* Petronas has option to buy a further 1 mtpa

* Sale underpins Gladstone project's first production train (Adds details, background)

PERTH, June 18 (Reuters) - Australian oil and gas firm Santos Ltd (STO.AX) has agreed to sell liquefied natural gas from its Gladstone project to venture partner Malaysia's Petronas [PETR.UL], securing its first sales contract for the project.

Santos said on Thursday it has agreed to sell 2 million tonnes of LNG a year to the state-owned Petroliam Nasional Berhad, also known as Petronas, for 20 years beginning in 2014. The gas will be used in the Malaysian domestic gas market.

Petronas, which owns a 40 percent stake in Gladstone, located in eastern Queensland state, also has an option to buy an additional 1 million tonnes of LNG a year, Santos said.

"Today's agreement underpins the volumes for the first train of the project and we remain on schedule for first shipments of LNG in 2014," Santos Chief Executive Officer David Knox said in a statement.

Santos said the terms and prices were confidential but in line with the wider industry. The deal is also subject to the Gladstone LNG project reaching a final investment decision, expected in the first half of next year.

Santos and Petronas have proposed to build a A$7.7 billion ($6.1 billion) LNG facility with an annual output of about 3 million tonnes in the first phase using coal seam gas as a feed.

Santos said earlier this month it was in advanced talks with an unidentified Asian customer to sell LNG from Gladstone. It has also said it may lower its 60 percent stake in the project to 51 percent. ($1=1.258 Australian Dollar) (Reporting by Fayen Wong; Editing by James Thornhill)