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UPDATE 2-Shell to pay $739 mln for Australian gas stake



UPDATE 2-Shell to pay $739 mln for Australian gas stake

Mon Jun 2, 2008 12:27am EDT

(Adds company and analyst comment, updates shares)


By Miranda Maxwell

SYDNEY, June 2 (Reuters) – Royal Dutch Shell (RDSa.L: QuoteProfileResearch) said on Monday it will pay $739 million for an interest in Arrow Energy Ltd’s (AOE.AX: QuoteProfileResearch) coal seam gas projects, as competition heats up for Australia’s vast coal seam gas assets, driving Arrow shares up by a fifth.

As exploration costs soar for offshore gas, energy firms struggling to secure access to conventional oil and gas projects are stepping up their search for new energy sources to feed roaring global demand.

Origin Energy (ORG.AX: QuoteProfileResearch), Australia’s largest coal seam gas producer, last week rejected a $13 billion bid from Britain’s BG Group (BG.L: QuoteProfileResearch), saying its coal seam gas reserves alone were worth over $15 billion.

Malaysian state oil company Petronas [PETR.UL] on Thursday paid up to $2.51 billion for a 40 percent stake in Australian energy firm Santos Ltd’s (STO.AX: QuoteProfileResearch) Gladstone liquefied natural gas (LNG) project.

“These transactions tell us there is a high degree of confidence from major LNG players that the gas from coal seams will work and will make lots of money,” said an energy analyst who declined to be identified because he does not specifically cover Arrow.

“For a company like Arrow, this is a significant injection of cash to fund its growth. That’s what they wanted,” he said.

Shares in Arrow jumped 20 percent to a record on news that Arrow and Shell would jointly develop projects to extract clean-burning natural gas from coal deposits in Australia, China, Indonesia, Vietnam and India.

Origin CEO Grant King has argued that using the Petronas/Santos deal as a benchmark, Origin’s coal seam gas reserves, now estimated at 10,000 petajoules, alone would be worth more than A$16 billion, well above BG’s offer.

Arrow said its A$776 million deal with Shell valued its proved and probable (2P) reserves at A$2.72 per gigajoule (GJ), or A$0.80 per GJ if using the largest estimate of the coal seam gas reserves. That compares with the Petronas/Santos deal values of A$4.91 and A$1.65 per GJ.


Another analyst, who also declined to be identified, noted a fair value comparison should include contingent resources, which Arrow has not estimated.

“The value was important, but the strategic drivers were equally important for us,” said Arrow CEO Nick Davies, adding the 2P valuation was comparable with a deal struck between Queensland Gas Company Ltd (QGC.AX: QuoteProfileResearch) and BG Group.

“The deal announced today is just the start,” Davies said.

Arrow has significant coal seam gas production facilities in the northeastern state of Queensland. It has four producing projects in the state and supplies gas for industrial users such as power stations.

Shell plans to acquire a 30 percent interest in Arrow’s coal seam gas holdings in Queensland for A$644 million and pay up to A$132 million for a 10 percent stake in Arrow International, a wholly owned subsidiary of Arrow Energy which holds Arrow’s international interests in coal seam gas opportunities.

The agreement also gives Shell a five-year option to acquire up to half of individual Arrow International projects, including activities in China. Under the deal, Shell can also negotiate the purchase of any LNG produced from the coal seam gas operations.

Arrow is also in a joint venture to build a proposed coal seam gas-fuelled LNG plant in Gladstone, also in Queensland.

The proposed $400 million plant, which plans to start producing by early 2011, will have an initial capacity of 1.3 million tonnes a year, with plans to double output later. That compares with two other 3-4 million metric tonne a year projects proposed by Santos and a Queensland Gas and BG venture.

By 0420 GMT, Arrow shares were up 15 percent at A$3.83. ($1=A$1.05) (Editing by James Thornhill & Ian Geoghegan)




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