Royal Dutch Shell takes over BG in the biggest deal of the decade

Royal Dutch Shell logo
Source: WikiCommons, author: Nopple

In the biggest energy deal of the recent years, Royal Dutch Shell has taken over Britain’s third-largest energy company, BG Group for $70 billion. The takeover will give Shell natural-gas assets in Australia and the U.S., as well as properties in Tanzania, where some of the world’s biggest gas discoveries have been made, and which may be used as a foothold to export gas to Asia.

Despite low crude oil prices being blamed for the recent spate of mergers an acquisitions, the Shell / BG deal is – in the words of Shell’s CEO Ben Van Beurden – “all about gas”. The newly-merged company will sell about 50 million tons of LNG a year by the end of the decade, Shell Chief Financial Officer Simon Henry said Wednesday after a press briefing in London – more than its two main competitors; Exxon Mobil and Chevron.

“We become the largest private LNG company in the world, and by a factor of two,” Henry said. With more LNG projects on the horizon, “we’ll have a leading position in the market for many years to come.”

Everybody agrees that the merger is more about LNG than shale gas. In the recent months Shell pulled out of shale projects in Europe, China, and South Africa, and neither of the two companies had any considerable interest in the U.S. shale plays. The acreage in Texas, Louisiana and Pennsylvania – owned by BG – yields a meagre 60,000 barrels of oil a day, and has consistently been underfunded.

What the deal is about, though, is efficiencies and trimming fat. The two companies aim to save at least $2.5 billion a year in costs now and in years to come. In Australia they have two LNG projects close to each other and where sharing infrastructure costs will improve the economics of both. Both companies hold assets in the North Sea, where a merger will most likely result in redundancies. According to Fortune magazine, the newly created $300 billion oil and gas company is expected to squeeze capital expenditure below $40 billion by 2016, from over $45 billion last year and shed $30 billion of non-core assets within three years, creating – in effect – a much leaner, more efficient entity.

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. BG also has promising offshore assets, including in east Africa, Kazakhstan and Trinidad. For Shell, after burning their fingers on unconventional deposits, offshore gas looks much more attractive, particularly in Brazil where BG’s portfolio will make Shell the leading foreign oil company in the country. According to Jefferies analysts led by Jason Gammel. BG’s production is set to increase to 557,000 barrels a day by 2020 from 144,000 in 2015.

Finally, Shell’s move onto BG was designed to assuage shareholders’ concerns that it is not replacing its reserves speedily enough to secure its long-term future; especially after Shell only replaced 26 per cent of the oil and gas it pumped last year.

“The combination will add some 25 per cent to Shell’s proved oil and gas reserves and 20 per cent to production, each on a 2014 basis, and provide Shell with enhanced positions in competitive new oil and gas projects, particularly in Australia LNG and Brazil deep water,” the pair said.

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