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SHELL TO ACQUIRE BG: IMPLICATIONS FOR THE NORTH SEA

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14 April 2015

Screen Shot 2015-04-08 at 08.12.04Shell announced an offer of a £47bn ($70bn) acquisition of BG in the second biggest oil and gas deal on record after Exxon and Mobil’s £51bn ($75.3bn) merger in 1998.  Shell and BG expect to make annual savings of £1.7bn ($2.5bn) and the combined company is estimated to be worth £180bn ($266bn). The transaction will create the largest independent LNG producer in the world forecast to produce nearly a fifth of global LNG supply in 2017-18. The other major prize for Shell is BG’s Brazilian oil portfolio of mean total reserves and resources amounting to 6 billion boe and gross production expected to peak at 2.6 million boepd.

With the low oil price and subsequent reduction in the share price of oil and gas companies with little downstream exposure, acquisitions represent an opportunity to increase reserve holdings quicker and more cheaply than through organic growth.  Shell is thought to have been interested in acquiring BG for some time and the current low oil price presented an opportunity to do so, even at a premium thought to be around 48% to market cap on the offer date. The deal increases Shell’s production by 20% and reserves by 25% particularly in Australia, Brazil, and East Africa. Strategically Shell is now also, in place of BG, one of the biggest suppliers of natural gas to China, which despite its recent decrease in economic growth rate remains one of the world’s fastest growing markets.

The BG share price had fallen by approximately 30% over the last year compared to Shell’s 10% reduction over the same period, creating a predator/prey situation. Overspending in US shale gas exploration, a decline in gas production in Egypt and rising costs in key markets such as the UK, Brazil and Australia have all been factors affecting the BG share price negatively.

As Shell announced the takeover bid, it reinforced its strategy to reduce exploration and to make global asset sales for the combined group totalling £20bn ($30bn) between 2016 and 2018. There are expected to be global synergies within the group and further job losses are expected, the North Sea included. However, Shell CEO Van Beurden said the company was to invest £4bn in the North Sea between 2016 and 2018 and was committed to the region. However, Shell had announced that it will sell some of its North Sea upstream assets (Anasuria along with Teal, Teal South, Guillemot A and Cook; Nelson; and Sean) after a profits warning in early 2014. Despite the fact that 17% of BG’s global production in 2014 came from the UK, it is likely that Shell will proceed with divestments comprising mainly mature fields and planned developments where an investment decision has yet to be made, across the combined Shell and BG global portfolio.

In the UK, BG has one firm and one contingent well commitment and five drill-or-drop commitments in addition to 3 discretionary wells in Hannon Westwood’s planned wells database. Shell has a number of future well commitments, including three firm, two as operator, along with four contingent wells and three drill-or-drop commitments.  One of these firm wells, in NNS Block 9/19b, is anticipated to spud in 2015 where it is targeting the K Prospect, with Apache as operator.  In addition, two firm exploration wells in Quad 29 are required, with both of these on licences awarded in the 27th Round, and are therefore to spud by 2016.

In Norway, we are not aware of any firm plans for E&A drilling by BG, either as operator or partner.  Shell has two drill-or-drop decisions, one as operator (Norwegian Sea) the other as partner (North Sea), which may lead to drilling by 2019.

Other than the firm commitment wells, it is unlikely that additional exploration will be undertaken, particularly in a low oil price environment, unless there are material prospects in acreage deemed to be important for retention as part of the long-term North Sea strategy. Non-core prospects are very likely to be farmed-out or, if a farm-out can’t be achieved, relinquished.

Forecast production from BG’s UK and Norwegian fields will add a further 120 mboepd to Shell’s estimated production of 305 mboepd for the region in 2015. However, much of BG’s UK production portfolio is mature. It was reported in July 2014 that BG had hired Rothschild in an advisory role in order to restructure its portfolio with plans to sell the Armada, Everest and Lomond fields. These, perhaps along with Erskine and others and the Shell assets put up for sale in 2014, will most likely still be considered for divestment. Many of Shell’s other UKCS fields are also very mature and a strategic review of the combined portfolio could identify further candidates for divestment. Shell’s Norwegian portfolio will likely remain intact.

In terms of potential new developments, other than Jackdaw, which accounts for about 50% of BG’s net resources in undeveloped discoveries, there is little in the way of potential new developments in BG’s portfolio that would be considered to be either material or strategic to the merged entity and divestment is likely also. Similarly, except for a handful of discoveries, much of Shell’s portfolio of undeveloped discoveries lacks materiality, is not strategic, or is technically challenging and divestments may be forthcoming.

Hannon Westwood CEO Ian Norbury commented: “Shell’s move to acquire BG has been expected for some time and obviously makes sound strategic sense. Shell has struggled with its worst production performance for over 15 years and several expensive dry holes internationally. The acquisition will increase Shell’s oil and gas reserves by almost 30%, will access a management team with a successful exploration track-record, and will position Shell as a key player in international LNG. Whilst the North Sea will remain a key production area, mature and non-strategic elements of the combined portfolio are likely to form part of the promised global asset sales”

Footnote: The transaction and its full implications for the UKCS and Norway will be the subject of a full HW Atlas Analytical Report available to subscribers.

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Hannon Westwood has been advising the oil and gas industry for over 20 years. Over the last five years we have provided board level insight leading to investments totalling $3.5 billion. We offer a wide-range of bespoke intelligence and portfolio business development services underpinned by our team of experts and our proprietary data systems.

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