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Shell, Arrow Sign Accord for $700 Million Gas Venture (Update2)

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Shell, Arrow Sign Accord for $700 Million Gas Venture (Update2) 

By Angela Macdonald-Smith

June 2 (Bloomberg) — Royal Dutch Shell Plc, Europe’s largest oil company, and Australia’s Arrow Energy Ltd. signed an initial accord for a $700 million venture to extract natural gas from coal seams to tap rising demand for cleaner-burning fuels.

Under the accord, Shell would buy a 30 percent stake in Arrow’s coal seam gas acreage in Queensland state, and a 10 percent interest in the Brisbane-based company’s international unit, Shell said today in an e-mailed statement. It would have the right to negotiate to buy any liquefied natural gas produced from the ventures. Arrow shares jumped to a record in Sydney.

The agreement follows last week’s accord by Malaysia’s Petroliam Nasional Bhd. to pay $2.51 billion for a stake in a rival Australian project led by Santos Ltd. proposing to use coal seam gas to produce LNG, the fastest-growing energy market. Shell was probably among the list of potential partners for the Santos project, JPMorgan Chase & Co. said April 9.

“This very obviously provides credibility for Arrow’s projects,” said Andrew Pedler, senior energy analyst at Wilson HTM Investment Group in Brisbane. “It is directioned both domestically and internationally, just by the character and nature of Shell.”

Arrow Energy gained as much as 78 cents, or 23 percent, to A$4.11 in Sydney trading. The stock was at A$3.88 on the Australian stock exchange at 10:53 a.m. local time. Liquefied Natural Gas Ltd., Arrow’s existing partner for an LNG project in Queensland state, advanced as much as 11 percent.

Rival Plants

Origin Energy Ltd., Australia’s biggest producer of natural gas from coal seams, on May 30 rejected a A$13.6 billion ($13 billion) takeover offer from BG Group Plc, citing the increased value of its reserves. BG, the U.K.’s third biggest gas company, in February formed an alliance with Queensland Gas Co. to build an LNG plant in northeastern Australia based on coal seam gas, one of five rival projects in the Gladstone region.

Origin Managing Director Grant King said May 30 the company will still seek to supply coal seam gas for LNG production in Queensland after rejecting the BG offer. Sunshine Gas Ltd., Sojitz Corp. and Galveston LNG Inc. are among other companies proposing LNG ventures in Gladstone.

Shell, the world’s biggest non-government owned LNG producer, will start negotiations with Perth-based LNG Ltd. now that the initial accord with Arrow has been reached, Arrow Chief Executive Officer Nick Davies said today on a conference call. The alliance may lead to three or four LNG production units in Queensland, with the first starting up in 2011, he said.

Rising Demand

The production units planned by the existing venture between Arrow and LNG Ltd., partly owned by Golar LNG Ltd., have a capacity of 1.3 million metric tons a year, less than half the size proposed by rival ventures in the region.

Demand for LNG is set to increase by 10 percent a year through 2015, more than five times estimated gains in crude oil, as power producers switch to cleaner fuels, according to Citigroup. LNG is gas chilled to liquid form for transportation by tanker. Coal-seam gas, mostly comprising methane, lies on the surface of coal and can be extracted when pressure on the coal seam is reduced, usually by removing water.

Shell will pay as much as A$644 million ($615 million) for the stake in Arrow’s Australian coal seam gas licenses and as much as A$132 million for the interest in Arrow’s Australian unit, Arrow said in a separate statement sent to the Australian Stock Exchange. Arrow will get an up-front cash payment of A$488 million from Shell once the venture agreement is completed, which is expected in July or August, Davies said.

The proposed alliance between Shell and Arrow would combine the complementary strengths of our two companies,” Chris Gunner, chief operating officer of Shell Development (Australia) Pty, said in the statement. “Shell has global gas marketing and financial strengths. Arrow has proven coal seam gas expertise.”

The venture would also include potential projects in China, Indonesia, Vietnam and India, Shell said.

To contact the reporter on this story: Angela Macdonald-Smith in Sydney at[email protected]

Last Updated: June 1, 2008 22:23 EDT

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