* Santos says Gladstone LNG needs extra gas supplies
* GLNG faces rising gas costs
* Santos shares flat as no ratings impact seen (Adds analyst, investor comments, share price reaction)
By Byron Kaye and Sonali Paul
SYDNEY/MELBOURNE, Aug 15 (Reuters) - Santos Ltd STO.AX will book a $1 billion impairment charge on its Australian liquefied natural gas project (LNG), it said on Monday, blaming low oil prices, a slow ramp-up and rising prices for gas to feed the plant.
The charge will deepen an expected loss when Santos reports its first-half results on Friday.
Analysts have long warned that the $18.5 billion Gladstone LNG (GLNG) project faces trouble due to uncertain output from Santos' coal seam gas wells that supply the plant.
Now it is being squeezed by weak global oil and LNG prices, while needing more gas from others to feed the LNG plant just as local gas prices are rising.
Prices are being driven up as new LNG plants, set to make Australia the world's largest LNG exporter by 2019, are competing with domestic gas demand, while supply growth is slowing as states restrict new drilling onshore and cash-strapped oil and gas companies cut spending. MD (Kevin) Gallagher has had to swallow some tough medicine in adjusting prior operating assumptions that have proven to be unrealistic given the new oil price and LNG market realities," Royal Bank of Canada analyst Ben Wilson said in a note.
The bad news for GLNG comes not only as a blow to Santos, which owns a 30 percent stake, but also its partners: French giant Total SA TOTF.PA , Malaysia's Petronas PETR.UL and Korea Gas Corp 036460.KS .
Santos said it has to buy more gas from other companies to help feed the GLNG plant and will pay more than previously expected for that gas.
"The expected impairment charge for GLNG is clearly disappointing but it is a consequence of the challenging environment which we now face," Gallagher said in a statement.
RBC's Wilson said Santos' more pessimistic outlook on the LNG market suggested it does not expect GLNG to be able to sell its full capacity of 7.8 million tonnes a year in the medium term and would only sell the 7.2 mtpa already locked into contracts.
The writedown did not come as a surprise, given that Gallagher, who took the reins in February, has been reviewing the group's assets. Analysts did not expect any impact on its already battered credit rating. Santos shares slipped just 0.1 percent.
"It would be a concern if oil prices were to stay low for an extended period of time," said Andy Forster, a portfolio manager at Argo Investments, which owns shares in Santos.