19 June 2015

ACCC to probe impact of BG deal on gas prices

The Australian competition watchdog is pushing ahead with an investigation into the ­potential impact of Shell’s planned $91 billion takeover of BG Group on east coast gas development and exploration, as well as the ­extent to which the two international gas giants compete against each other and with ­others in the domestic market.

As one of the key regulators around the world ruling on the agreed oil and gas mega-merger between Shell and BG, the ­Australian Competition & Consumer Commission has released a market inquiries letter detailing the areas in which it wants to focus its investigation.

“It has been suggested to the ACCC that the main potential competition issue arising from the proposed acquisition relates to the impact of the proposed acquisition on the future wholesale supply of gas in eastern Australia,” the ACCC said in the letter to industry stakeholders.

“In particular, we are seeking views on the impact on prices, whether Shell and BG compete closely and how easy it would be for existing competitors to ­expand and/or new competitors to enter the market and constrain the merged entity, post-merger.”

The ACCC has also specifically asked for submissions on whether the takeover would reduce the incentive to develop and explore for more gas.

The Shell-BG deal, if it goes ahead, will produce a giant oil and gas producer with an offshore Brazilian oil focus and by far the world’s biggest LNG exporting business, centred in Australia. The planned deal also needs the backing of regulators in ­Europe, Brazil and China.

The potential merger comes as three big LNG export plants (one owned by BG) ramp up at Gladstone, rapidly tripling east coast gas demand, increasing domestic prices, raising fears of a shortage and driving claims that domestic buyers cannot get competitive tenders.

The main overlap between Shell and BG in Australia is in Queensland, where BG this year started exporting its coal-seam gas from the Curtis LNG plant at Gladstone.

Shell holds 50 per cent of the nearby Arrow onshore coal-seam gas joint venture, which in recent years abandoned plans for its own stand-alone LNG plant. Instead it has been focusing on a tie-up with one of the other LNG plants.

Shell chief financial officer Simon Henry said the company was happy with initial responses from regulators. “In every country so far the ­response has been neutral to good,” he told Bloomberg TV recently, noting that it was still early days and that the deal was not expected to be finalised before early next year.

Fertiliser and explosives maker Incitec Pivot, one of Queensland’s biggest gas users which has campaigned for gas reservation policies to rein in prices, has publicly said the fate of the Arrow gas reserves, and whether the path of the gas to the domestic market would be delayed, were its main worries about the merger.

“The broad concern is the industry doesn’t need more consolidation,” Incitec chief James Fazzino said last month. “If you look at the Arrow acreage it is the highest-quality undeveloped gas in a state, Queensland, that has a shortage of gas.”

He said a positive outcome could be if both the BG acreage and the Arrow acreage, which is 50 per cent-owned by PetroChina, were developed faster.

Mr Fazzino said he was keen to talk to the ACCC and Shell about the prospects for Arrow.

The ACCC said it wanted to know how closely Arrow and BG competed and whether a tie-up would change either’s incentive or ability to supply domestic users. It has also asked for input on whether the takeover “would ­affect incentives to explore and develop gas reserves”. The ACCC will accept submissions until July 9 and plans to announce its ­decision on September 3.

The Foreign Investment Review Board also needs to approve the merger for it to go ahead.

In a note this month, Credit Suisse analysts said the ACCC and FIRB could call for asset sales before letting the deal pass. “There probably is the potential for a case to be made for a ­‘negotiated remedy’, where part of the reserves are sold off, either via an asset sale or contracted ­volumes,” Credit Suisse said.

The review of the Shell-BG merger comes at the same time ACCC chairman Rod Sims conducts a study of east coast gas markets in light of the problems being encountered by domestic gas buyers as the LNG plants ramp up.

The ACCC has been told to use its investigatory powers to delve into the confidential and opaque gas contracts that other studies have failed to do.

On Tuesday, the takeover passed its first hurdle in the US, securing anti-trust regulatory clearance from the Federal Trade Commission.

BG said the deal still needed approval by relevant anti-trust and regulatory authorities, and support from both shareholders.

Shell’s chief executive, Ben van Beurden, said: “Securing early termination of the US antitrust waiting period from the FTC at this early stage is a clear demonstration of the good progress we’re making on the deal. We’re well under way with the anti-trust and regulatory filing processes in relevant jurisdictions around the world and we’re confident that, following the usual thorough and professional review by the ­relevant authorities, the deal will receive the necessary approvals. We remain on track for ­completion in early 2016.”