UPDATE 3-Santos in talks on LNG project deals; Shell eyed

* Santos shares jump over 7 pct on speculation of Shell deal

* Santos: in talks on LNG supply deals, Gladstone equity sale

* Australian Financial Review: Santos in talks with Shell

* AFR: 30-35 pct equity stake to Shell estimated at A$2 bln (Recasts, adds detail from another report, updates shares)

By Fayen Wong

PERTH, July 9 (Reuters) - Australia's Santos (STO.AX) said it is in talks to sell equity in its flagship Gladstone LNG project, triggering a surge in its shares on expectations it may soon sign a multi-billion dollar deal with Royal Dutch Shell (RDSa.L) and avert another equity raising.

Santos said on Friday it was in "detailed ongoing discussions" with a number of parties on potential equity and liquefied natural gas sales, and on collaboration between projects, but there was no certainty of any agreements.

Santos was responding to two newspaper reports that said Shell has entered the fray to bid for a strategic stake in the Gladstone coal-seam gas-to-liquefied natural gas project.

The Australian Financial Review said Santos was close to inking a A$2 billion ($1.75 billion) deal with Shell to sell a 30-35 percent stake in the Gladstone LNG project, while The Australian newspaper said Shell is competing with China's Sinopec Corp (600028.SS) and Korea Gas Corp (036460.KS) to buy a stake of between 9-20 percent that could be worth as much as A$1 billion.

"Shell has indicated that they are open to consolidation and it is only logical for them to talk to Santos since Shell's acreage is land-locked and is located right next to Santos' project, which has a deep-water port good for LNG ship loading," said Di Brookman, an energy analyst at CLSA Asia-Pacific Markets.

The reports sent Santos shares to close at a 12-week high of A$14.00, after gaining 9.7 percent. Trading volumes of 16.2 million was also 3.5 times its 90-day average.

A deal with Shell could be among a long list expected in Australia's resources sector after the government watered down plans for a disputed mining tax last week.

A potential deal with Shell would greatly reduce Santos' burden in funding its Gladstone project and alleviate investor concerns that it would need to carry out another equity raising. Santos tapped investors for A$2.5 billion last year to cover its share of costs for another LNG project in Papua New Guinea.

It would also bring clout and certainty to the Gladstone project that major buyers need before they can commit to contracts worth tens of billions of dollars.

"If Shell joins Santos, the credit rating for the project would go up and that will also make it easier for them to sign on major customers," Brookman said.

The Gladstone project, which will have an initial production capacity of 3.4 million tonnes per annum, is slated for an investment decision later this year, with production targeted to start in 2014.

Santos owns a 60 percent stake in the project, which it estimated in 2008 would cost A$7.7 billion to build, though most analysts are expecting the cost to have increased.

Deutsche estimates the cost for Santos to build two processing plants with an export capacity of 7.2 mtpa to be A$16.4 billion.

Malaysian state-owned energy giant Petronas [PETR.UL] owns 40 percent, which it bought 2008 for $2.5 billion.

The AFR said Shell would become the operator of Gladstone LNG plant, which will process coal-seam gas into LNG -- and incorporate its own Curtis Island LNG project into Gladstone, which is considered to have a superior site for an LNG processing facility.

A merger of projects on the plant level would yield significant economies of scale, although there could also bring risk of a delay to the project's start-up by about six months, said Adrian Wood, an energy analyst at Macquarie Group.

Should a deal be done between Santos and Shell, the project merger would also hasten the pace for further consolidation in the industry, potentially drawing the Australia Pacific LNG project owned jointly by ConocoPhillips (COP.N) and Australia's Origin Energy (ORG.AX) to the table.

Coal seam gas, a form of natural gas extracted from coal beds, has in recent decades become an important source of energy in the United States, Canada, and other countries, but development of Australia's rich deposits has only just started.

There are five proposed LNG projects around Gladstone port in the northeastern Queensland state. Other projects in the pipeline include BG Group's (BG.L) Curtis LNG project and a smaller plant planned by Liquefied Natural Gas Ltd (LNG.AX). ($1=1.141 Australian Dollar) (Editing by Ed Davies and Lincoln Feast)