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Shell Elects Huibert Vigeveno To Lead BG Group Merger

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By: MICHEAL KAUFMANMay 29, 2015 

European oil giant Royal Dutch Shell Plc (ADR) (NYSE:RDS.A) has elected the head of its Chinese operations to lead the company’s planned merger with UK-based natural gas company, BG Group Plc (ADR) (OTCMKTS:BRGYY), as it seeks approval from regulatory authorities in several countries.

Earlier this week, the oil company told its senior executives that it has elected Huibert Vigeveno, executive chairman for Shell’s Chinese operations, to spearhead the deal with BG Group, according to a report by Sky News. Mr. Vigevena, who will hold the position of executive VP for integration, will see his appointment become effective in August.

Last month, Shell announced it had entered an agreement with BG Group, to acquire the company in a cash and stock deal. Shell’s decision to pay a 52% premium in the current low price environment attracted criticism.

Valued at $70 billion, it is the biggest merger & acquisition (M&A) deal in the energy space in more than a decade, making Mr. Vigeveno’s role particularly crucial. The oil giant expects the merger to result in synergies, which is likely to lead to cost savings of $2.5 billion per year, starting from 2018. The cost savings expectation is based on the assumption that Brent crude oil prices will recover to $75 per barrel by 2017, and average $90 per barrel between 2018 and 2020.

Oil prices are currently down around 40% over the past year, as concerns of a supply glut in international oil markets put downward pressure on prices. West Texas Intermediate crude oil futures, for July delivery, are trading at $57.68 per barrel, while Brent crude oil futures, for similar delivery period, are trading at $62.58 per barrel.

In addition to synergies, Shell’s position in the global liquefied natural gas (LNG) markets is expected to strengthen, especially in China and Australia. The two companies provided a combined total of 45 million tons of LNG last year, accounting for nearly 20% of the global LNG production.

Shell currently has a market capitalization of $190 billion, whereas BG Group’s market capitalization stands just under $60 billion. Considering the size of the two entities, their integration would require anti-trust approval from countries that are concerned about the size of the merged entity.

Shell’s decision to appoint an executive who has headed its Chinese operations comes as the company seeks regulatory approval from Chinese authorities. Gaining anti-trust approval from China’s Ministry of Commerce remains a hurdle to Shell’s acquisition of BG, as concerns about the size of the new entity’s LNG operations are on the rise. BG was already on track to become China’s largest LNG supplier over the next two years, and merging with Shell would raise further red flags for regulators.

A news report by the Financial Times has cited lawyers, who consider Mofcom, the Chinese Ministry of Commerce, as the biggest hurdle to regulatory approval. While approval may eventually be won, Shell may have to divest LNG assets of the new entity for the deal to go through.

“I would be astonished if there is not a request to sell one of their grade one LNG assets,” a senior oil executive told the Financial Times.

“In a market where there is a lot of new production appearing, Shell-BG is better placed. It will have a greater geographical reach and access to more vessels, which means shorter distances for delivery. The proximity to buyer will be an advantage. Whoever can capture the best margins will be king,” Ed Cox of ICIS told the Financial Times.

Mofcom requires 180 days to complete its three-phase review of the deal, with the clock starting after Shell’s formal notification of the deal to the regulator.

Shell’s stock is currently trading 0.89% lower in today’s trading session at the New York Stock Exchange, as of 11:13 AM EDT.

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