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Why Shell May Get Less Than It Bargained For In BG Deal

Royal Dutch Shell’s $70 billion purchase of BG Group may not be as attractive as it once seemed.

According to BG’s 2014 annual report, if British-based BG were to be taken over by another company, the government of Kazakhstan would have the right to buy BG’s 29.25 percent share in a valuable Kazakh gas field, which so far has represented some 15 percent of the company’s total production and 9 percent of the $19 billion in revenue it made last year.

There’s no word yet from Astana on what the Kazakh government plans to do with the Karachaganak field of gas condensate once the sale is closed next year. Its Energy Ministry said it had no information about the matter from either BG or Shell.

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“Therefore currently the ministry has no update on the transaction and the existing agreements between the companies,” Uzakbai Karabalin, the first deputy energy minister of Kazakhstan, said in a statement.

Previously, the Central Asian country has chosen to keep its energy resources to itself in such circumstances. BG’s report says its share in the field doesn’t expire for another 22 years, unless BG is sold and Kazakhstan wants to reclaim Karachaganak.

A Shell spokeswoman told The Wall Street Journal that the Anglo-Dutch company expected to keep the field.

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Karachaganak in northwestern Kazakhstan is believed to be one of the world’s largest such gas fields, containing an estimated 48 trillion cubic feet of gas and 9 billion barrels of condensate. According to the BG annual report, no more than 10 percent of its reserves have been extracted so far. BG also produced about 85,000 barrels per day of oil equivalent from the well.

The Kazakh field isn’t the only potential headache arising from Shell’s acquisition of BG. When it announced the merger plans more than a month ago, it said its primary interest was BG’s gas holdings in Brazil. In particular it cited two areas, or “blocks,” of energy exploration, named BM-S-9 and BM-S-11. They’re estimated to be worth virtually the entire value of the company’s assets in Brazil.

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Yet one of those blocks also is at risk because of the merger. BG’s annual report said, “In certain specific circumstances, it is possible that BG Group’s partners in BM-S-9 [Petrobras and Repsol Sinopec Brasil] have a right of first refusal to acquire BG Group’s interest … in the event of a change of control of BG Group plc.”

Neither BG nor Shell would comment on the rights to BM-S-9, which contains the valuable Sapinhoa and Lapa blocks.

Energy analysts interviewed by Reuters said losing the Karachaganak field might not have much of an effect on the plans of a merged Shell and BG, but losing the Brazilian block would hurt. “Brazil is central to the acquisition,” said one analyst, Neill Morton at the London financial services group Investec. “Sapinhoa is pretty important. It’s one that Shell is looking to get its hands on.”

By Andy Tully of Oilprice.com

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  • Karl Yong on May 20 2015 said:
    It seem that all the analysts seem to miss including PetroChina in their M&A equation. PetroChina has became the biggest player in the oil industry, thank to the hedge funds and investment bank, like GS, in shorting the price of the oil players in the west. Effective a serious takeover of BP and even Chevron become a distinct possibility.

    PetroChina buying BP make the most sense for the following reason:-
    1) access to oil source and drill sites.
    2) technology both in exploration and down stream in refinery.
    3) a well established market reach.

    Chinese had demonstrated to be the best partner to the European companies when they takeover Volvo. Since Geely takeover, Volvo had grew from strength to strength, to the point of setting factory in America! Isn't it an ironic, companies like Nike miked cheap Asia labor and sacked all their US factories staff, Chinese will be hiring US labor to make car! While takeover by their western rival, typically mean replacement or sacking of management, engineers and labor force. Geely embraced all of them and Volvo grew to be much stronger.

    Therefore, maybe being takeover by PetroChina isn't going to be a bad idea compare to Shell or Exxon.

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