Shell’s offer for BG shows how the energy business is changing

Shell and BG A vote for gas Apr 11th 2015 | From the print edition JAM tomorrow, but never jam today. That was long the lament about Britain’s third-largest energy company, BG Group. In recent years it has been notable for its great prospects, troubled operations, wobbly management—and lately its weak share price, down by 20% in the past 12 months. Now Shell, an Anglo-Dutch giant, has pounced, with a £47 billion ($70 billion) cash-and-shares offer which pays BG shareholders a 50% premium on what their holdings were worth just before the bid. The combined companies’ stockmarket value will be around $250 billion. Barring regulatory objections, the merger will be completed early next year. The deal—one of several involving BG that has been rumoured, on and off, for years—shows that for the beleaguered international oil giants, buying reserves, even juicily priced, is cheaper and easier than finding and developing them. It also highlights the scope for consolidation since the fall in the oil price last year, which has sent companies scrambling to cut costs and pacify investors. In November Halliburton, an oil-services company with headquarters in Houston, bought Baker Hughes, a smaller rival, for $35 billion. This deal, far bigger, boosts Shell’s declining oil and gas reserves by a quarter, and makes the new firm the world’s third-largest gas producer (see chart). Among Western-owned oil and gas firms, it will be second only to ExxonMobil by market capitalisation, and by 2018 its output will overtake that of its American rival. That assuages one worry for Shell’s investors—that it is not replacing its reserves speedily enough to secure its long-term future. But it may not quell another (contradictory) one: that a notoriously spendthrift management is splurging (To indulge in an extravagant expense or luxury: splurged on room service.) cash on acquisitions which it could be returning to shareholders. Shell counters this as follows: it has already said it is cutting capital spending by $15 billion; it now says it will raise asset sales to $30 billion in 2016-18. It also insists it will maintain its dividend and raise its share buy-backs, all to its newly enlarged investor base. It expects the takeover to generate $2.5 billion of cost savings, in everything from purchasing to trading. The deal underlines the way the money is moving in the energy industry. Shell managers highlight the increasing attractiveness of midstream (transport) and downstream (refining and distribution) activities, which offer less risk and fatter margins than finding and developing new oil and gas. One of BG’s strengths, for example, is in the liquefaction, transport and storage of gas. Its fleet of giant tankers will boost Shell’s clout in the world gas market. The purchase also demonstrates that gas is a more promising business than oil. Indeed, Shell is now more Gas Giant than Big Oil. This is not easy money: the global gas industry has been plagued by high costs (much gas is in hard-to-reach places such as the Arctic and deep oceans) and low prices (thanks to competition from other fuels and America’s shale-gas glut). But the market is growing, supplies are abundant and the environmental outlook friendlier than for oil. BG has promising offshore assets, including in east Africa, Kazakhstan and Trinidad. Some are troubled: a big investment in Egypt is beset by political difficulties. Others are doing better. A $20 billion Australian project is now producing gas from coal. Having tripped up in shale ventures in China and America, Shell is now betting heavily on offshore gas. Simon Henry, its finance chief, says he doubts the gas glut will persist. In any case, a bigger and stronger company is better placed to ride it out. Other deals may follow, just as the last oil-price crash in the 1990s brought a wave of mergers. Among possible takeover targets are Tullow, a British oil and gas explorer (whose share price rose by 4.5% on news of the BG deal, having fallen by half since last summer). Such small companies with exciting but risky projects are particularly exposed in current conditions. But bigger acquisitions could be on the horizon too, perhaps even involving BP, Britain’s largest energy company, which no longer looks too big to buy. Absorbing BG will keep Shell busy for a while (particularly given its mixed record in managing previous purchases). But the deal could prompt one of its two main American rivals, Chevron or ExxonMobil, to try to regain dominance by making a move on BP. For all their enthusiasm for the deal, Shell and BG are merging mainly from necessity. Though BG had stopped disappointing shareholders, and had brought in a capable new boss, Helge Lund, from Norway, its fortunes were too closely tied to volatile gas prices; and its main oil partner in Brazil, Petrobras, is mired in a corruption scandal. For its part Shell was struggling to replenish reserves and cut costs. Assuming BG delivers, the deal solves both these problems, and strengthens Shell’s cashflow. The fall in the oil price has highlighted the weaknesses of energy companies that place big, long-term bets on difficult production and exploration projects. When times were good they excited their engineers with the technical challenges, and boosted their executives’ egos with ever-bigger balance-sheets. Firms are now dealing with rising debts—those of the largest American and European energy companies have risen by $31 billion so far this year—and falling share prices, down by a fifth since the summer. They are selling assets in a buyers’ market. Behind the Shell-BG deal, and the speculation of more mergers to come, is an even more fundamental shift in the energy industry. Contrary to some expectations, the oil-price fall has not derailed the American shale boom. The small, flexible and innovative firms that specialise in horizontal drilling and hydraulic fracturing are proving better at cutting costs, raising productivity and adapting to market fluctuations than the lumbering giants who have long dominated the industry. Dinosaurs may mate to ensure the survival of their species. But this is an age of mammals. From the print edition: Business

Santos, BG to link Australia LNG pipelines in bid to cut costs

Thu, Jul 04 01:18 AM EDT By Rebekah Kebede PERTH, July 4 (Reuters) - Australia's Santos Ltd and BG Group PLC agreed on Thursday to link their major gas pipelines, allowing them to buy, sell, and swap gas supplies - a move that will help slash costs at a time when they have been hit by budget overruns. The long-awaited first step toward collaboration between three coal seam gas to LNG projects under construction on Australia's seaboard should result in savings of hundreds of millions of dollars, according to Santos. The connection between the two projects' pipelines will also allow upstream gas field operations to continue when their liquefied natural gas plants are shut for routine maintenance. "We're spending less than $50 million on this, but we think it will generate savings over the long term of many times that," Rod Duke, Santos vice president of Gladstone LNG Downstream, told Reuters. "We expect that this will be just one of many mutually beneficial arrangements across the industry in the future," Duke said. Santos, BG, and Origin Energy are leading the construction of three separate coal seam gas to LNG projects on Queensland's Curtis Island at a total cost of more than A$60 billion ($54 billion) but have been criticized for failing to collaborate and save costs. Santos' Gladstone LNG project has seen its costs jump around 15 percent from $16 billion to $18.5 billion, while BG's Queensland Curtis Island LNG has seen a 36 percent blowout to $20.4 billion from $15 billion, mostly due to a strong Australian dollar. There may also be collaboration with Arrow LNG, a fourth coal seam gas to LNG project that is a joint venture between Royal Dutch Shell and PetroChina , although the project appears to have stalled. This year, Origin Energy offered Arrow the opportunity to work together on the expansion of its A$24.7 billion plant under construction on Curtis Island. ================ Entire Pakistan is talking of this Mega corruption carried out by hungry rulers from PML-N, but shameless brothers are least bothered.They are bent upon doling out such huge amounts of this poor cash starved country without any certification or Audits just in haste to fill their own pockets. The unfortunate part of this episode is that despite such hue & cry from all over the country on these payments, our Mr. Suo-Moto is sleeping as nothing is happening around. The mega corruption of Rs 100 billion in clearing circular debt By Shafiq Awan ISLAMABAD: PML N stalwart will earn Rs 100 billion as commission out of total payment of circular debt 500 billion. The said stalwart is a family member of Mian Nawaz Sharif and holds an important ministry at federal government. He is said to be the caretaker of Mian Nawaz sharif’s finnical interest. Sources disclosed that after this deal it was decided to clear all the circular debt. The political circles and financial experts were surprised to know how a huge amount of 500 billion rupees was set to clear within months. Later it was disclosed by a CEO of an energy company that this was decided after paying 20 percent commission. However he admitted that during past regime this commission was between 10 to 15 percent but PML N Government raised this ratio with the promise of more benefits to the companies. He was hopeful that through 20 percent commission their payments would not be held in future and they would be accommodated in rates as well. He further disclosed that this deal was struck during the recent visit of the Energy and the said Minister to UAE. Sources further disclosed that all the payments have been made in advance in UAE. The said CEO admitted the commission is a routine matter but 5 percent addition by the current regime is the only difference. Sources disclosed that a commission of 20 percent was settled between the Energy companies and PML N to clear the debt. The energy companies were insisting to fix the rate up to the 15 percent but later it was mutually agreed to 20 percent with the commitment that no more companies would not be asked to pay further amount to any government functionaries including ministers. Sources disclosed the Minister related to Energy and power Sector demanded the companies for his share but he was told this job is related to Finance Ministry so he could not be accommodated in this deal as it has nothing to deal with the production of electricity or fixing the rates. Later the said Minister was asked not to interfere in this matter. But his cronies continued pressurizing the energy companies after he was warned again and at a moment he was about to replaced but he was advised to behave and ultimately he decided to surrender. Sources disclosed that the said Minister interfered on the behest of family MNA of Sharifs. Talks underway with India over LNG imports News Comments (0) Online50 min ago | Comments (0) NEW DELHI - Talks between India and Pakistan to export natural gas from the former to the latter through a pipeline are underway. State gas utility GAIL’s Chairman and Managing Director B Tripathi proposed to lay a 110 km pipeline from Jalandhar to the Wagah border via Amritsar to supply natural gas to Pakistan. Gas in its liquid form (liquefied natural gas or LNG) will be imported via ports in Gujarat and will be moved through GAIL’s existing pipeline network till Jalandhar. The proposed line will ensure the transfer of gas from Jalandhar to Wagah. “Pakistan has demonstrated interest in taking LNG from us to meet its energy demand and the export is techno-commercially feasible. We can carry the process forward if the government of India approves it and if we can reach a commercial agreement,” Tripathi said. Pakistan initially wanted to import 1-1.5 million tonnes of LNG, however, pricing and other commercial negotiations are currently ongoing, he added. LNG imports to India currently range between $13 and 14 per million British thermal units after including customs or import duty, pipeline transportation charges and local taxes, thus the price upon delivery will be close to $21. Although Pakistan currently does not have an LNG import facility, it is willing to buy LNG from GAIL provided that India exempts it from taxes to bring down the cost.