Energy mega-merger, analysis

April 2015

Petroleum Merger Analysis

It’s certainly viewed as a consolidation play in the energy sector, but what does the Royal Dutch Shell’s $91 billion bid for British Gas Group mean for the wider economy?

Brisbane-based Queensland Gas Company is part of the BG Group and is the first of the three major CSG to LNG players to start exporting from Gladstone’s Curtis Island.

If the deal goes ahead for Shell, it will affect not only the fast-growing LNG business it is buying from BG Group, but could potentially impact Shell’s stake in Brisbane-based Arrow energy. 

A Shell veteran of 13 years and now QUT Associate Professor of Technology Management & Strategy, Professor Robert Perrons, said the takeover would see Shell become a major player in Queensland’s LNG industry. 

“BG Group clearly has a sizeable stake in Queensland’s CSG production, so this translates to Shell potentially having a significantly larger footprint in Queensland’s CSG domain than it did a few weeks ago,” Professor Perrons said.

“The thing to remember here is that Shell already had a presence in the CSG space via Arrow Energy.  Arrow is a 50-50 joint venture between Royal Dutch Shell and PetroChina.” 

Arrow has CSG fields in the Surat and Bowen basins with exploration tenements covering approximately 41,500sqm across the state. The deal is expected to unlock value for Arrow and find new ways to commercialise its huge gas reserves.

“One major benefit to mergers like these is that companies can potentially achieve gains in operational efficiency by reducing duplicated functions, and Shell will definitely be keeping its eyes open around the world for those kinds of opportunities.   Arrow Energy and BG Group’s Queensland assets will definitely attract that kind of careful attention.” Professor Perrons said. 

Shell, part of the “Big Oil” players, have been active in LNG space for some time and the BG deal is expected to catapult the Netherlands-based company from being one of the biggest LNG players in the world to the undisputed leader.   

“Shell has been actively shaping its portfolio over many years to include a lot of LNG and it has long been considered one of the leaders in the LNG space, including finding the gas, producing it, liquefying it, getting it to the customer, and selling it. Shell has a strong position in this entire value network,” Professor Perrons said. 

While the takeover bid created headlines around the world, M&A rumours of a Shell and BG tie-up have been in the market for over a decade.

“The two companies have been a great strategic fit for at least a decade and probably longer,” Professor Perrons said.

“In this low energy price environment, the numbers finally made sense because every oil & gas company’s portfolio is worth less in market conditions like these. 

“So these types of low-price environments are frequently the catalyst for M&A behaviour like we’re seeing now.”

Attention now turns to other major oil companies who may be looking to consolidate while the price of oil is low. 

“That’s a very reasonable expectation. As noted earlier, low-price environments in commodity markets are often the catalyst that leads to a flurry of M&A activity. It’s been getting more and more expensive and technically challenging over the years for Big Oil super majors to replenish their reserves with their own exploration efforts,” Professor Perrons said.

“Thus, buying somebody else’s portfolio is a low-risk strategy for improving a company’s reserves pretty quickly.  Think back to the late 1990s, when oil crashed below $US10/barrel. 

“We saw a flurry of mergers back then in the span of a year or two: Exxon merged with Mobil, BP bought Amoco and Arco, Chevron merged with Texaco, etc. In fact, Shell almost looked strange back then because it didn’t merge with another Big Oil company.”

The proposed deal also highlights the balance sheet strengths of BG’s other assets, including its high-value Brazilian crude oil assets.

“Bear in mind that this (proposed) merger was made with global portfolios in mind rather than being all about Queensland CSG,” Professor Perrons said. 

Professor Robert Perrons is Associate Professor of Technology Management & Strategy at Queensland University of Technology. Prior to joining QUT as an Associate Professor in 2011, he worked in a wide variety of roles and locations for Shell International’s Exploration & Production division. He started his career in Shell’s Strategy & Economics team in 1997, and then worked for several years as a production engineer in the company’s overseas operations (offshore and onshore). He then left Shell for three years to work as an Industrial Research Fellow at the University of Cambridge, but re-joined Shell again in 2004 to become the company’s Executive Coordinator of R&D. He is also a member of the Society of Petroleum Engineers.