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Buying BG Would Give Shell Answer to Stranded Australian Gas

Article by James Paton published 8 April 2015 by Bloomberg

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Screen Shot 2015-04-08 at 08.12.04Royal Dutch Shell Plc is seeking an outlet for its natural gas reserves in Australia’s Queensland state. The proposed acquisition of BG Group Plc could provide one.

If Shell buys BG, the combined company would surpass Chevron Corp. as the world’s second-largest oil and gas producer. It would also streamline the energy industry in Australia, which is on the path to becoming the world’s biggest liquefied natural gas exporter later this decade, and may prompt other acquisitions in the sector.

Shell and its partner PetroChina Co. have been looking at alternatives for their Arrow gas project after shelving plans to build an export terminal this year due to cost blowouts and slumping energy prices. Arrow is in the same state as plants run by Santos Ltd. and ConocoPhillips — and BG’s $20 billion Queensland Curtis LNG development.

“The Arrow assets are stranded at the moment, so it’s highly probable that if Shell’s purchase of BG went through, that gas would be monetized through QCLNG,” Neil Beveridge, an analyst at Sanford C. Bernstein in Hong Kong, said Wednesday. “That’s definitely a source of value” in any deal, he said.

The talks between Shell and BG have other implications in Australia, where investors see potential for a deal to spur further acquisitions.

Santos, Oil Search Ltd. and Beach Energy Ltd. rose today in Sydney trading partly on speculation that they’re potential targets, said Evan Lucas, market strategist at IG Ltd. in Melbourne.

Shortfall

In Queensland LNG, the projects face a potential shortfall in feedstock of as much as 30 percent over the next two decades, according to Credit Suisse Group AG. Linking Arrow to Curtis Island would help fix the problem.

Shell in 2013 delayed a decision to go ahead with Arrow due to cost inflation in Australia. The company said in January that a new export plant was “off the table.”

BG said on Tuesday it’s in advanced discussions with Shell although there’s no certainty that an offer will be forthcoming. The deal, which envisions combining Europe’s largest oil explorer by market value with the No. 3 U.K.-based energy producer, would be the industry’s biggest in at least a decade, according to data compiled by Bloomberg.

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