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Why Shell May Get Less Than It Bargained For In BG Deal

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Screen Shot 2015-05-10 at 22.33.15By Andy TullyPosted on Tue, 19 May 2015 

Royal Dutch Shell’s $70 billion purchase of BG Group may not be as attractive as it once seemed.

According to BG’s 2014 annual report, if British-based BG were to be taken over by another company, the government of Kazakhstan would have the right to buy BG’s 29.25 percent share in a valuable Kazakh gas field, which so far has represented some 15 percent of the company’s total production and 9 percent of the $19 billion in revenue it made last year.

There’s no word yet from Astana on what the Kazakh government plans to do with the Karachaganak field of gas condensate once the sale is closed next year. Its Energy Ministry said it had no information about the matter from either BG or Shell.

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“Therefore currently the ministry has no update on the transaction and the existing agreements between the companies,” Uzakbai Karabalin, the first deputy energy minister of Kazakhstan, said in a statement.

Previously, the Central Asian country has chosen to keep its energy resources to itself in such circumstances. BG’s report says its share in the field doesn’t expire for another 22 years, unless BG is sold and Kazakhstan wants to reclaim Karachaganak.

A Shell spokeswoman told The Wall Street Journal that the Anglo-Dutch company expected to keep the field.

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Karachaganak in northwestern Kazakhstan is believed to be one of the world’s largest such gas fields, containing an estimated 48 trillion cubic feet of gas and 9 billion barrels of condensate. According to the BG annual report, no more than 10 percent of its reserves have been extracted so far. BG also produced about 85,000 barrels per day of oil equivalent from the well.

The Kazakh field isn’t the only potential headache arising from Shell’s acquisition of BG. When it announced the merger plans more than a month ago, it said its primary interest was BG’s gas holdings in Brazil. In particular it cited two areas, or “blocks,” of energy exploration, named BM-S-9 and BM-S-11. They’re estimated to be worth virtually the entire value of the company’s assets in Brazil.

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Yet one of those blocks also is at risk because of the merger. BG’s annual report said, “In certain specific circumstances, it is possible that BG Group’s partners in BM-S-9 [Petrobras and Repsol Sinopec Brasil] have a right of first refusal to acquire BG Group’s interest … in the event of a change of control of BG Group plc.”

Neither BG nor Shell would comment on the rights to BM-S-9, which contains the valuable Sapinhoa and Lapa blocks.

Energy analysts interviewed by Reuters said losing the Karachaganak field might not have much of an effect on the plans of a merged Shell and BG, but losing the Brazilian block would hurt. “Brazil is central to the acquisition,” said one analyst, Neill Morton at the London financial services group Investec. “Sapinhoa is pretty important. It’s one that Shell is looking to get its hands on.”

By Andy Tully of Oilprice.com

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