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Energy giant Royal Dutch Shell intends to buy BG Group for $69.6 billion to create the largest company dealing in liquefied natural gas (LNG) and eliminate duplicate expenses caused by the plunge in oil prices during the past nine months.
The proposed purchase, which Shell announced April 8, is to be made in both cash and stock, and would pay a 50 percent premium to shareholders in BG, one of the leading LNG companies, and leave them with a 19 percent stake in the new company. The deal still must be approved by the shareholders of both companies.
Both companies have been hurt by the decline in oil prices, so the sale is seen as saving money and therefore benefiting both. “The result will be a more competitive, stronger company for both sets of shareholders in today’s volatile oil price world,” Shell Chairman Jorma Ollila said in a statement.
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Once the deal is complete, Shell said, the company’s proven oil and gas reserves will rise by 25 percent and its production will increase by 20 percent because it will control BG’s gas resources in East Africa, a large LNG gas project in Australia and the Santos Basin oil fields off the shore of Brazil.
Absorbing BG’s LNG operations is expected to be especially profitable for Shell, according to BG’s CEO, Helge Lund. “BG’s deep water positions and strengths in exploration, liquefaction and LNG shipping and marketing will combine well with Shell’s scale, development expertise and financial strength,” he said.
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LNG is becoming increasingly popular around the world because, unlike ordinary gas, it can be transported by ship as well as pipeline. Energy companies cool the gas into a liquid, which greatly reduces its volume for transport on special oceangoing vessels.
Even without the acquisition of BG, Shell recently has become a leading producer of LNG due to the tens of billions of dollars it has invested in LNG production plants, storage facilities and related facilities. Shell CEO Ben van Beurden said during a conference call with reporters on April 8 that buying BG would make the combined company the world’s largest LNG producer.
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A Shell statement said that once it controls BG’s assets, the company expects that the merged entity will have two areas of strategic growth: deep water energy and integrated gas. Each area could generate between $15 billion and $20 billion of cash flow a year, it said.
“Bold, strategic moves shape our industry,” van Beurden said. “BG and Shell are a great fit. … This transaction fits with our strategy and our read on the industry landscape around us.” He said that in Shell’s search for acquisitions, BG was “always at the top of the list.”
A statement by Shell said the company is expected to reap additional profits of about $2.5 billion per year at a time when oil prices are low and expected to remain that way for some time. The price of crude has plummeted by about 50 percent since June 2014 because of a supply surfeit and depressed demand.
By Andy Tully Of Oilprice.com
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Andy Tully is a veteran news reporter who is now the news editor for Oilprice.com