Royal Dutch Shell Plc is seeking an outlet for its natural gas reserves in Australia's Queensland state. An acquisition of BG Group Plc could provide one.
If Shell buys BG, the combined company would surpass Chevron Corp. as the world's second largest oil and gas producer. It would also help streamline the energy industry in Australia, which is on the path to becoming the world's biggest liquefied natural gas exporter later this decade.
Shell and its partner PetroChina Co. have been looking at alternatives for their Arrow project after shelving plans to build an export terminal earlier this year due to cost blowouts and slumping energy prices. Arrow is in the same state as plants run by Santos Ltd., ConocoPhillips — and BG's $ 20 billion Queensland Curtis LNG development.
"That's definitely a source of value" in a deal between Shell and BG, Neil Beveridge, a Hong Kong-based analyst at Sanford C. Bernstein, said Wednesday. "The Arrow assets are stranded at the moment, so it's highly probable that if Shell's purchase of BG went through, that gas would be monetized through QCLNG."
The wider issue is that Queensland's natural gas projects face a potential shortfall in feedstock of as much as 30 percent over the next two decades, according to Credit Suisse Group AG. Linking Arrow to Curtis Island would help fix the problem.
Shell in 2013 delayed a decision to go ahead with Arrow due to cost inflation in Australia. The company said in January that a new export plant was "off the table."
BG said on Tuesday it's in advanced discussions with Shell although there's no certainty that an offer will be forthcoming. The deal, which envisions combining Europe's largest oil explorer by market value with the No. 3 U.K.-based energy producer, would be the industry's biggest in at least a decade, according to data compiled by Bloomberg.
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