Shell’s $70B plan to buy BG Group faces regulatory hurdle in Australia

By JAMES PATON and RAKTEEM KATAKEY
Bloomberg

Royal Dutch Shell’s plan to buy BG Group faced its first regulatory hurdle after Australia’s competition agency said the deal could reduce natural-gas supply to local customers and boost prices. A decision on granting approval has been delayed until November.

The transaction may weaken the incentive for Shell’s Arrow Energy venture with PetroChina to feed gas to the domestic market, the Australian Competition and Consumer Commission said in a statement on Thursday. That’s because it would allow Shell to send the Arrow supplies to BG’s Queensland Curtis project, which is liquefying the fuel for export to customers in Asia.

Shell has won approvals from the US and Brazil, and the European Union gave its unconditional assent to the $70 billion deal this month. The Australian regulator has been studying the transaction in the context of a broader review of the gas market on the country’s east coast as buyers such Incitec Pivot express concerns about a supply shortage and surging prices. Shell also requires approvals from China’s antitrust regulators.

“The impact of the deal on the local gas market in the US, Brazil and Europe is nothing like it is in Australia and so there’s greater scrutiny,” said Richard Griffith, an oil analyst at brokerage Canaccord Genuity in London. “The regulator wants more information and Shell is saying there’s enough gas to supply the local market and export.”

Further Submissions

Griffith is among analysts who don’t expect Australia to block the acquisition. The competition regulator has invited further submissions on the Shell deal and plans to make a final decision Nov. 12.

The BG deal is on track to be completed in early 2016, Shell’s Australian unit wrote in an e-mailed response to questions on Thursday. The companies will continue to work closely with the regulator on the review, according to the statement.

Shell’s B shares, the most widely traded, fell 0.1% to 1,669.50 pence as of 10:20 a.m. in London. BG rose 0.2% to 1,017.50 pence.

Shell and PetroChina have been looking at alternatives for their Arrow gas project after shelving plans to build an export terminal due to increasing costs and slumping energy prices. Santos and a ConocoPhillips venture with Origin Energy are also building LNG plants in Queensland.

Domestic Supply

The regulator said that domestic supply agreements probably won’t be sufficient to underpin the development of the Arrow gas resources and that the company would want to obtain “high-volume, long-term contracts,” given the significant costs to tap the reserves.

The review shouldn’t be a “major impediment” for Shell, said Graeme Bethune, CEO of consulting firm EnergyQuest in Adelaide. “The Shell-BG deal could accelerate the development of the gas. Having the development is better than not having the development.”

Still, the Shell deal “potentially further consolidates gas reserves” on the east coast of Australia, where a small group led by the Queensland LNG projects control about 90% of the supplies, Australian manufacturer Adelaide Brighton wrote in documents lodged with the regulator in July.

Wholesale gas prices in Australia are forecast to double over the next two years as a significant amount of the supplies in east Australia are committed to exports, Australia & New Zealand Banking Group said in a July report.

The BG acquisition is “unlikely to increase the ability or incentive of Shell to foreclose supply of gas to rival LNG plants because the merged entity would only supply a small share of the global LNG market,” the watchdog said.

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