Shell joins Arrow in Australian gas project

Royal Dutch Shell is the latest international energy group to expand into Australia’s thriving coal bed methane industry, joining forces with Arrow Energy to develop projects in Australia and internationally.

The deal follows last week’s rejection by Origin Energy of Australia of a A$13.6bn (£6.6bn) bid from BG Group, the UK oil and gas exploration and production company.

Shell will invest up to A$776m to buy 30 per cent of Arrow’s coal bed methane acreage in Queensland and 10 per cent of its international assets, including sites in China, India, Indonesia and Vietnam. Shell has a five-year option to acquire up to 50 per cent of individual Arrow projects.

Coal bed methane, known in Australia as coal seam gas, is natural gas produced from coal deposits. Jeroen van der Veer, Shell’s chief executive, said more challenging resources were becoming important to big international oil companies.

“I expect companies like Shell to move all the time towards more difficult oil and gas, where we can apply our technology,” he said. “A lot of the easy oil and gas can be done by national oil companies.”

Arrow’s Shell deal comes after a spate of activity in Australia’s coal seam gas industry in recent days. Last Thursday, Petronas of Malaysia agreed to invest US$2.5bn (£1.2bn) in a gas project being developed by Santos, an Australian oil and gas group. The project will convert coal seam gas in Queensland into liquefied natural gas. Shell had considered teaming up with Santos.

The high price paid by Petronas prompted Origin to reject BG’s raised bid last week. Petronas paid an equivalent of A$1.65 per gigajoule of Santos’s proven, probable and possible (3P) reserves, while BG’s offer implied a value of about 70 Australian cents a gigajoule for Origin’s 3P reserves.

Analysts at Citigroup calculated that the Shell deal valued Arrow’s 3P reserves at about 80 Australian cents per gigajoule, and suggested the deal “may come as some encouragement for BG Group”. Nick Davies, Arrow chief executive, said Arrow’s plan to spin off its international projects into a business that could raise capital via an initial public offering was no longer needed.

At the moment, the gas from Arrow is expected to be sold in local markets, but Shell could invest in liquefaction capacity in Aust-ralia.

Arrow’s shares rose 14 per cent in Sydney yesterday to A$3.79. Origin closed at A$16.03, above BG’s A$15.50 a share offer, and far above the level of about A$10 a share shortly before BG’s initial approach was revealed.

Shares in Royal Dutch Shell fell 17p to £21.