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China wants LNG supply concessions in return for BG merger approval, sources say

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Beijing holding a “wonderful piece of leverage”

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by Veselin ValchevFriday, 20 Nov 2015

Royal Dutch Shell Plc (LON:RDSA) might have to shell out in order to get regulatory approval from Chinese authorities for its proposed takeover of fellow UK energy giant BG Group.

According to unnamed sources cited by Reuters, the Chinese ministry of commerce has requested that Shell review liquefied natural gas (LNG) prices in long-term supply contracts with the nation’s top energy companies – CNPC, CNOOC and Sinopec.

“It’s a reasonable request given the premiums Chinese and other Asian buyers are paying for long-term LNG versus those for Europe and America. The market is oversupplied, and this situation may well last through the next five to 10 years,” said a gas official with one Chinese state energy firm.

According to several sources, Beijing also wants to extend current contract terms in a bid to lower supply volumes at a time of flagging demand.

Analysts said Shell, one of the top LNG suppliers to China, would be willing to make some concessions to keep the deal on track.

“Reducing the volumes might be a price Shell would be prepared to pay to gain approval from the Chinese regulator. It would be possible to find markets for any volumes not taken by Chinese buyers so the impact on revenues would be limited,” according to independent energy consultant Andy Flower.

Shell and China’s commerce ministry declined to comment on the negotiations.

The approval of the BG deal, which Shell has said is still compelling despite low oil prices, is a “wonderful piece of leverage” for Beijing, one of the sources said, while the demands come as earlier this month the Chinese regulatory approval process entered its third and final 60-day phase.

Meanwhile, the Australian Competition and Consumer Commission (ACCC) granted its unconditional approval for the merger this week, despite earlier reservations on competition grounds. The deal has now received three of the five mandatory regulatory clearances required for the merger to go through. Besides China, Shell still needs to convince Australia’s Foreign Investment Review Board of the tie-up merits.

Shell’s share price closed Thursday’s session with a 1.6 percent gain at 1,666.00p. Year-to-date, Shell’s stock is still down more than 22 percent.

As of 07:51 GMT, Friday, 20 November, Royal Dutch Shell Plc ‘A’ share price is 1,666.00p.

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