ConocoPhillips plans venture with Origin

ConocoPhillips, the US oil group, plans to invest up to A$9.6bn for a half share in a coal seam methane gas venture with Origin Energy, the Australian energy group that has been fighting an A$13.8bn takeover offer from BG Group of the UK.

The deal underlines international interest in Australia’s vast energy reserves, particularly cleaner fuels such as liquefied natural gas. However, the industry to convert gas from coal seam into LNG, is still in its infancy. ConocoPhillips and Origin plan to export the gas from Queensland to markets in Asia.

Origin’s deal with ConocoPhillips, together with an independent expert’s report that found the Australian group’s shares were worth A$28.55 to A$30.71, has forced BG to the sidelines. The UK group has made repeated offers to buy Origin, however its latest offer of A$15.50 a share was regarded as too low by Origin.

Shares in Origin, Australia’s largest producer of gas from coal seams, jumped A$2.03, or 13 per cent, to A$17.68 in trading on Monday morning. Analysts said BG’s current offer was likely to be dead, adding Origin had agreed a favourable deal that underlined the worth of its developing reserves.

Under the deal announced to the Australian stock market, Origin plans to become the upstream coal seam gas provider to the project, with ConocoPhillips taking the role of the downstream LNG operator. ConocoPhillips will become a 50 per cent shareholder in the company that owns all of Origin’s CSG interests.

”This company will develop these interests into a CSG to LNG project, providing a fully aligned partnership across the LNG value chain,” Origin said.

This deal involves an up-front payment of A$6bn, additional fixed contributions of $A1.15bn to carry Origin’s share of costs to so-called “final investment decision”, expected at the end of 2010, and additional payments of A$600m at the point that each of the four proposed LNG trains is approved.

Grant King, Origin managing director, said the deal with ConocoPhillips would “transform Origin”. ”We will have the financial strength to fund a decade of growth,’’ he said.

Kevin McCann, Origin chairman, said the Australian group welcomed ”one of the world’s largest integrated energy companies as its partner in monetising our extensive CSG reserves and resources. ”This outcome represents an outstanding result for Origin shareholders,” Mr McCann said.

Jim Mulva, chairman and chief executive of ConocoPhillips, said the US group had access to the leading coal bed methane resource in Australia, comprising 8.1million net acres. “The company has enhanced its LNG position with the creation of an additional Australian LNG hub serving Asia-Pacific markets.’’

Origin had recently selected a short list of groups with which it would consider undertaking a deal to jointly develop its CSG reserves. Others interested in Origin’s assets were thought to include Royal Dutch Shell and Chevron of the US.

The transaction needs to be passed by Australia’s Foreign Investment Review Board.

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Copyright The Financial Times Limited 2008