Charles Ellinas — 19/04/2015
Driven by the low oil price, Royal Dutch Shell’s $70 billion acquisition of BG Group plc promises to create the second biggest publicly traded oil company in the world and a liquefied natural gas (LNG) production giant.
The combined company would have a market value of about $250bn, compared to $360bn for ExxonMobil, the world’s largest publicly traded oil and gas company. BG fits well with Shell’s growth strategy, particularly in giving more emphasis to gas rather than oil, LNG and deep-water production. The acquisition is expected to be completed during the first quarter of 2016.
The Shell Chief Financial Officer (CFO) indicated that some projects could be delayed, put on hold or even cancelled as the company moves to eliminate duplication of effort and create synergies. About $30bn asset sales are expected, as well as $2.5bn reduction in operating and exploration costs, by 2018.
Shell is aiming to create a leaner and more efficient company as it goes forward into what is expected to be a long period of low oil prices. It will give priority to strategically important regions and in that process it is important to better understand the potential implications for the East Med.
The deal
Shell will pay BG shareholders the equivalent of $5.70 and 0.46 shares of Shell stock for every BG share. This values BG’s shares at 50% more than their value the day before the deal was announced. As a result, BG shareholders will own 19% of the combined company.
The move will expand Shell’s oil and gas reserves by 25% and add 20% to its annual production. BG shareholders also benefit as BG was facing huge expenditure demands in developing the assets it helped discover, particularly in Australia and Brazil.
It is possible that by 2018 Shell may surpass ExxonMobil as the world’s largest publicly traded oil and gas company, unless of course, and as expected, ExxonMobil itself goes for acquisitions.
Operational Priorities
Shell is betting LNG will play an increasing role, especially beyond 2020, as the world seeks cleaner energy and alternatives to coal. Gas is a key aspect of this acquisition. On the back of this deal Shell will turn into a much more focused company, very strong in gas and in deep water.
The acquisition of BG will bring deep-water production from Brazil. Through this, Shell gains access to probably the best deep-water oil reserves globally. By 2025, Brazil is projected to deliver 550,000 barrels of oil equivalent per day of production to the combined Shell-BG company, which would represent 13% of its total production.
Australia also offers strong growth potential, in terms of Shell’s Gorgon and Prelude and BG’s Queensland LNG projects. The new company will have a combined LNG production of 45 million tonnes per annum by 2018, which is more than what ExxonMobil and Chevron produce together.
In Canada, both companies have plans for LNG exports but there will be rationalisation. There are also interests in the US, the Gulf of Mexico and the Caribbean. In addition to the UK, other important areas are Kazakhstan, India, Indonesia and East Africa.
Shell is also committed to Turkey. It signed a number of joint operating agreements with TPAO and it is currently carrying out deep-water exploration in the western Black Sea. Turkey’s energy demand is expected to double in the next decade in line with its rapid economic growth and Shell intends to be part of this. This is a key reason Shell refrained from entering Cyprus’ EEZ.
Going forward, Shell would give priority to projects under its control that would give it diversity of supply, a lower capital cost per unit and the right timing.
But in all the publicity surrounding this acquisition there is no mention of the East Med and Egypt, where both Shell and BG have significant interests, other than BG’s well-publicised problems in Egypt. This is important to Cyprus as it is in the process of promoting sale of its gas to BG in Egypt. So let’s look into this.
Implications for the East Med
Egypt has been a key source of LNG exports for BG. But it has been unable to obtain enough gas to supply its LNG plant at Idku. As a result, BG declared force majeure on its Egyptian LNG business last year.
Despite attempts to resolve the problem and the announcement a few weeks ago of a multi-billion dollar plan to increase gas production, earlier this month BG blamed the Egyptian government, which it says is diverting such large quantities of gas to the domestic market that there is little available for export.
BG said that Egypt still owes it $900 million and that it shipped no liquefied natural gas from Egypt during the first quarter of 2015, with only one shipment expected in the second quarter. Dwindling gas reserves and problems in Egypt have also dragged down BG’s profits and contributed to the company’s $1.4bn loss in 2014.
“In the absence of concerted action from the Egyptian government, the future commercial operation of Egyptian LNG is increasingly at risk,” BG said beginning of April. In addition to the diversion of gas to the domestic market, BG said Egypt posed the “most significant security challenge” of its portfolio.
Shell also has a number of assets in Egypt and like other companies it experienced major difficulties during the political turmoil of the past few years, with hundreds of millions of dollars of overdue payments still owed by the government.
Analysts say that Shell will have little appetite for pursuing further production in Egypt, now that it is becoming very much a domestic gas supply industry. This was confirmed by Shell’s CFO who was cool on the company’s future in Egypt, and generally projects in the region, as Shell’s focus turns to more promising projects elsewhere. Asked about the future of the combined group in Egypt, Shell’s CFO said: “In valuation of things we haven’t given it a lot of value in our assessment of the combined company going forward.”
Where all this leaves potential deals with Israel and Cyprus is difficult to see at this stage. But with Shell committed to Turkey and its coolness on its future in Egypt, such deals could be at risk. Timing may also be an issue as no serious developments may be expected before the completion of the BG acquisition early next year and the company and management reorganisation that will follow.
This makes the development of a Plan B for Cyprus’ gas exports focusing on Europe even more critical.
SOURCE
The combined company would have a market value of about $250bn, compared to $360bn for ExxonMobil, the world’s largest publicly traded oil and gas company. BG fits well with Shell’s growth strategy, particularly in giving more emphasis to gas rather than oil, LNG and deep-water production. The acquisition is expected to be completed during the first quarter of 2016.
The Shell Chief Financial Officer (CFO) indicated that some projects could be delayed, put on hold or even cancelled as the company moves to eliminate duplication of effort and create synergies. About $30bn asset sales are expected, as well as $2.5bn reduction in operating and exploration costs, by 2018.
Shell is aiming to create a leaner and more efficient company as it goes forward into what is expected to be a long period of low oil prices. It will give priority to strategically important regions and in that process it is important to better understand the potential implications for the East Med.
The deal
Shell will pay BG shareholders the equivalent of $5.70 and 0.46 shares of Shell stock for every BG share. This values BG’s shares at 50% more than their value the day before the deal was announced. As a result, BG shareholders will own 19% of the combined company.
The move will expand Shell’s oil and gas reserves by 25% and add 20% to its annual production. BG shareholders also benefit as BG was facing huge expenditure demands in developing the assets it helped discover, particularly in Australia and Brazil.
It is possible that by 2018 Shell may surpass ExxonMobil as the world’s largest publicly traded oil and gas company, unless of course, and as expected, ExxonMobil itself goes for acquisitions.
Operational Priorities
Shell is betting LNG will play an increasing role, especially beyond 2020, as the world seeks cleaner energy and alternatives to coal. Gas is a key aspect of this acquisition. On the back of this deal Shell will turn into a much more focused company, very strong in gas and in deep water.
The acquisition of BG will bring deep-water production from Brazil. Through this, Shell gains access to probably the best deep-water oil reserves globally. By 2025, Brazil is projected to deliver 550,000 barrels of oil equivalent per day of production to the combined Shell-BG company, which would represent 13% of its total production.
Australia also offers strong growth potential, in terms of Shell’s Gorgon and Prelude and BG’s Queensland LNG projects. The new company will have a combined LNG production of 45 million tonnes per annum by 2018, which is more than what ExxonMobil and Chevron produce together.
In Canada, both companies have plans for LNG exports but there will be rationalisation. There are also interests in the US, the Gulf of Mexico and the Caribbean. In addition to the UK, other important areas are Kazakhstan, India, Indonesia and East Africa.
Shell is also committed to Turkey. It signed a number of joint operating agreements with TPAO and it is currently carrying out deep-water exploration in the western Black Sea. Turkey’s energy demand is expected to double in the next decade in line with its rapid economic growth and Shell intends to be part of this. This is a key reason Shell refrained from entering Cyprus’ EEZ.
Going forward, Shell would give priority to projects under its control that would give it diversity of supply, a lower capital cost per unit and the right timing.
But in all the publicity surrounding this acquisition there is no mention of the East Med and Egypt, where both Shell and BG have significant interests, other than BG’s well-publicised problems in Egypt. This is important to Cyprus as it is in the process of promoting sale of its gas to BG in Egypt. So let’s look into this.
Implications for the East Med
Egypt has been a key source of LNG exports for BG. But it has been unable to obtain enough gas to supply its LNG plant at Idku. As a result, BG declared force majeure on its Egyptian LNG business last year.
Despite attempts to resolve the problem and the announcement a few weeks ago of a multi-billion dollar plan to increase gas production, earlier this month BG blamed the Egyptian government, which it says is diverting such large quantities of gas to the domestic market that there is little available for export.
BG said that Egypt still owes it $900 million and that it shipped no liquefied natural gas from Egypt during the first quarter of 2015, with only one shipment expected in the second quarter. Dwindling gas reserves and problems in Egypt have also dragged down BG’s profits and contributed to the company’s $1.4bn loss in 2014.
“In the absence of concerted action from the Egyptian government, the future commercial operation of Egyptian LNG is increasingly at risk,” BG said beginning of April. In addition to the diversion of gas to the domestic market, BG said Egypt posed the “most significant security challenge” of its portfolio.
Shell also has a number of assets in Egypt and like other companies it experienced major difficulties during the political turmoil of the past few years, with hundreds of millions of dollars of overdue payments still owed by the government.
Analysts say that Shell will have little appetite for pursuing further production in Egypt, now that it is becoming very much a domestic gas supply industry. This was confirmed by Shell’s CFO who was cool on the company’s future in Egypt, and generally projects in the region, as Shell’s focus turns to more promising projects elsewhere. Asked about the future of the combined group in Egypt, Shell’s CFO said: “In valuation of things we haven’t given it a lot of value in our assessment of the combined company going forward.”
Where all this leaves potential deals with Israel and Cyprus is difficult to see at this stage. But with Shell committed to Turkey and its coolness on its future in Egypt, such deals could be at risk. Timing may also be an issue as no serious developments may be expected before the completion of the BG acquisition early next year and the company and management reorganisation that will follow.
This makes the development of a Plan B for Cyprus’ gas exports focusing on Europe even more critical.
SOURCE
