Shell-BG mega deal takes center-stage

The energy world woke up to the news of the mega-merger between Royal Dutch Shell and BG Group closing the gap on market leader US Exxon Mobil after a plunge in prices. The $70 billion price tag of BG Group made the purchase the largest in over a decade. The deal will make the combined company the largest producer of liquefied natural gas (LNG) in the world. Shell will pay a mix of cash and shares that values each BG share at around 1,350 pence, the companies said. This is a hefty premium of around 52 percent to the 90-day trading average for BG.

The move is a shot across the bow for the other oil majors as Shell is going all-in on the future of LNG as a vital source of energy, particularly for the fast growing economies in Asia. BG has some of the world’s most ambitious projects in liquefied natural gas (LNG), where demand is growing as consumers turn away from more polluting fuels such as coal.

The purchase of BG is also a reminder that the oil majors are really oil and natural gas majors. BG will give Shell major LNG positions in Australia, and to a lesser extent in East Africa. Shell is already the world’s leading LNG company and it would get BG’s capacity in LNG logistics – complex infrastructure that includes terminals, pipelines, specialised tankers, rigs, super coolers, regasification facilities and storage points.

The momentum around the world to reduce greenhouse gas emissions makes LNG particularly attractive. Since it burns much cleaner than coal, it has the potential to significantly reduce smog in the bustling cities of China, Korea, and elsewhere. Coal is on its way out, and natural gas could become the second largest source of energy in the world.

Although LNG trade has been growing relatively quickly in recent years, it has still been quite small compared to the amount of oil and coal that moves around the world. The prospect that LNG would become one of the most important global fuel sources might have seemed silly until recently. Efforts to reduce greenhouse gases will only increase in the coming years, further bolstering the push towards LNG.

The oil majors have struggled in recent years to make big new discoveries and book new oil and gas reserves. Despite high levels of capital spending, there have been precious few giant discoveries. The path towards growth, then, for many of the largest firms is to grow through consolidation. Shell will be able to grow its oil and gas reserves by 25 percent from the BG deal.

Shell and BG’s LNG volumes are likely to balloon in the medium term from major projects, and the combined entity’s LNG capacity will be the largest globally at 45 million tons a year in 2017-18, representing nearly a fifth of global LNG supply. Shell and BG’s combined Brazilian production of about 150,000 boe/d in 2014 is forecast by management to increase to 550,000 boe/d by 2020, solidifying Shell’s foothold in deepwater pre-salt oil offshore Brazil. So, it is not just LNG that will be expanding, other key producing assets such as deep water and the upstream engine are expected to grow.

BG had a market capitalisation of $46 billion as of the time the deal was announced while Shell was worth $202 billion and Exxon, the world’s largest energy company by market value, was worth $360 billion.

FRANK UZUEGBUNAM

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