Petronas, Asia's biggest LNG producer, will acquire a 40% stake in the project for an initial $US2.008 billion, while Santos will retain the remaining 60% and act as the development's operator.

Petronas will also make a further payment of $US500 million once the partners have reached a final investment decision (FID) for a second LNG train.

The first train of Gladstone LNG will have a capacity of 3-4 million tonnes per annum. First cargoes are scheduled for early 2014.

The GLNG plan was announced in July last year and Santos said it is on track to enter front-end engineering design late this year and a FID by early 2010.

Dual pre-FEED studies are underway and environmental applications have been lodged.

According to Santos, the GLNG agreement with Petronas establishes a new benchmark for the value of eastern Australian gas resources and represents a major step towards realising its coal seam methane to LNG strategy.

The agreement, which saw Santos go into a trading halt today pending the announcement, sells a third of Santos' CSM proven plus probable (2P) reserves and less than 11% of its total 2P oil and gas reserves.

The CSM resources will be drawn from Santos' Greater Fairview and Roma fields with Santos remaining the upstream operator with 60%.

The joint venture partners will now develop and operate the 450km gas pipeline to Gladstone; develop and operate the LNG liquefaction plant on Curtis Island at Gladstone; and undertake all marketing activity, accessing Petronas' established customer base in Japan, Korea and Taiwan.

Underlying assets will be held directly in a traditional unincorporated joint venture.

The agreement fully aligns the interests of both companies across all strategic elements of the value chain from resources to plant development and operation, and LNG marketing, Santos said.

Santos acting chief executive David Knox said today's announcement followed an extensive selection process undertaken over the last four months.

"We are very pleased to be entering a long-term, fully aligned venture with Petronas to develop GLNG," he said.

"Both parties are fully committed to the rapid development of GLNG and our partnership also provides clear scope for broader regional cooperation."

Petronas president and chief executive Tan Sri Mohd Hassan Marican welcomed the new partnership.

"While Petronas is already a major LNG player, the GLNG partnership with Santos is strategically very important to us as it provides an excellent growth opportunity to our LNG business," he said.

According to Santos, proceeds from the transaction will largely be used to fund its pipeline of growth projects.