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Shell Handed A Get-Out-Jail Card As Its $70 Billion Bid For BG Hits An Obstacle

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Tim Treadgold, CONTRIBUTOR

Shareholders in Royal Dutch Shell ngIf: ticker will be uncertain whether they should thank, or criticize, the Australian Government’s competition regulator for threatening the proposed $70 billion merger with rival oil and gas producer, BG Group ngIf: ticker .

On one hand, a deal which could transform Shell is being threatened. On the other hand, missing out on BG could be the best result for Shell.

The problem is that BG’s primary appeal to Shell is that the target, once known as British Gas, is heavily exposed to liquefied natural gas (LNG), a fuel moving into a period of significant over-supply and potentially lower prices, at least in the short term.

BG’s Value Could Fall Sharply

When the LNG flood hits the market from next year BG’s value could plunge.

Comments by Rod Sims, chairman of the Australian Competition and Consumer Commission (ACCC) indicate that approval for the deal might be withheld on the ground that it might restrict the availability of natural gas for the Australian market.

But, whether that’s good or bad for Shell given concern about a possible collapse in the price of liquefied natural gas (LNG) is the unknown factor.

It is possible that Sims has tossed Shell a get-out-jail card because while the merger with BG has been hailed as an opportunity to create the world’s biggest producer of LNG the financial appeal of that objective is fading.

“Amber Light Concern”

Sims described the position of his agency as “amber light concern” because the merger could “substantially lessen competition”.

Shell and BG announced their plans to merge in April and have spent the past five months guiding the process through a tortuous government approvals process with Shell chief executive, Ben van Beurden, acknowledging this week that there was a modest chance of the deal failing.

European competition regulators have given their approval. Chinese regulators are still considering their position. Australian regulators have another two months to consider the proposed merger.

Australia is important to the deal because BG is in the final stages of building a big LNG project in the State of Queensland, using natural gas extracted from coal seams as the feedstock.

LNG Flood On The Way

The low calorific vale of coal-seam methane initially caused outside observers to criticise the financial strength of the project, with that criticism growing as a flood of LNG heads for the global market, including the imminent start-up of U.S. LNG exports to Europe.

For Shell, the prospect of Australian intervention in the BG deal will be causing a sense of deja vu because 14 years ago it saw an earlier corporate deal involving another LNG producer run off the rails thanks to the Australian Government refusing to approve its takeover of Woodside Petroleum.

Back in 2001 Shell upset government regulators by revealing a plan to “sequence” LNG developments to an internal corporate timetable, rather than develop projects at a pace which would please the government.

Not In The National Interest

In effect, Australia decided that Shell taking over Woodside was not in the national interest.

This time around it’s a variation on a theme with Sims raising the possibility that Shell’s ownership of BG would see too much Australian gas sold into the world market, creating a shortfall (and higher prices) at home.

In theory, Shell could overcome the BG objections by entering into agreements to reserve gas for local customers.

But, whether it wants to do that, or whether it wants to use the Australian intervention as an escape clause for a deal which is looking less attractive today than when it was announced remains to be seen.

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