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Gas Wars Down Under Finally Come To An End: Shell-BG Group Tie-Up Gets Green Light

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Royal Dutch Shell CEO Ben Van Beurden addresses a keynote speech during the World Gas Conference in Paris on June 2, 2015. Photo Credit:  ERIC PIERMONT/AFP/Getty Images)

Tim Daiss, CONTRIBUTOR: DEC 4, 2015

The proposed $70 billion Shell-BG Group mega deal, one of the largest energy deals in a decade, is now a reality, at least in Australia.

On Thursday, the Australian Foreign Investment Review Board (FIRB) gave the green light to the energy tie-up. The deal has already received regulatory approval in the US, EU and Brazil, while regulatory approval from Chinese authorities is still pending, but expected to be granted. The FIRB approval comes just two weeks after the Australian Competition and Consumer Commission (ACCC), the country’s competition regulator, approved the deal.

The angst over the deal had come from East Coast manufacturers. They claimed that the proposed merger, announced in April, would reduce the supply of natural gas for domestic markets (particularly along the country’s populated East Coast) in favor of more lucrative liquefied natural gas (LNG) markets in the Asia-Pacific region, which accounts for around two-thirds of total global LNG demand.

Shell holds a 50% stake in Arrow Energy, which produces coal-seam gas – also known as coal-bed methane (CBM) – in Queensland’s Surat and Bowen Basins. Arrow’s reserves are the largest unconventional gas reserves in Eastern Australia but currently are not aligned with any LNG project. Earlier this year, Shell and partner PetroChina shelved their Arrow LNG project plans due to budget blow outs and cost over runs as well as the ongoing plunge in oil and gas prices. LNG prices in Asia have plunged from just over $20 per million British Thermal Units (MMBtu) in February 2014 to $7.28 per MMBtu for January delivery. Global oil prices have plunged from $115 per barrel in June 2014, and are now hovering around a troubling $40 per barrel.

BG, for its part, holds a majority stake in the Queensland Curtis LNG project (QCLNG), the world’s first project to turn gas from coal seams into LNG. The project exported its first cargo last December. Neil Beveridge, an analyst at Sanford C. Bernstein in Hong Kong, said recently that the Arrow assets are stranded at the moment, so it’s highly probable that if Shell’s BG acquisition came through, that gas would be monetized through QCLNG.

There have been varying opinions from analysts and industry officials over the issue, but it seems that the final approval for the Shell-BG tie-up would actually help domestic gas markets in Australia. It would spur development of Arrow’s resources as well as other undeveloped gas resources in addition to putting the needed infrastructure in place to accommodate that development, which would be beneficial for gas markets, including Australia’s East Coast.

It also appears, though this statement likely won’t sit well with manufactures that put up fierce resistance over the deal, that if gas buyers (manufacturer) are prepared to pay full market price for their natural gas supplies, then producers will gladly supply the gas. Taking the argument a notch higher, some analysts claim that manufacturers have been unwilling to sign gas contracts unless they were at earlier prices, which are now below current market prices, which actually weakened the credibility of the manufactures’ position.

A combined Shell-BG entity would become the largest LNG trader in the world, with enormous power and clout. It would control of 44 million metric tons per year of LNG, according to energy consultancy Wood Mackenzie.

SOURCE

Tim Daiss is an energy journalist and geopolitical analyst based in Asia.

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