Shell-BG Deal Could Face Regulatory Sanctions, But Shell Will Do Everything It Can To Save Deal
Ever since announcing the $70 billion deal to acquire BG Group Plc. back in April, Royal Dutch Shell Plc. has been busy these last few months obtaining the required merger related approvals from various regulatory authorities. After obtaining the required clearances in Brazil, the U.S., and Europe, the process hit a snag in Australia. This is not surprising as Australia is significantly more affected by the deal in comparison to the other countries. We believe that the Australian competition authority could ask Shell to divest some of its holdings before giving the necessary clearance to the deal and the company could face similar demands from Chinese regulators as well. We also believe that Shell will agree to the conditions imposed (if any) as the company stands to benefit from the merger in the long run. The deal will allow Shell to consolidate its leadership position in the global Liquefied Natural Gas market and increase its exposure towards the exploration and development of deepwater hydrocarbon reserves, primarily the pre-salt reserves offshore Brazil.
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Shell-BG Deal Hits Roadblock In Australia
Shell announced it was acquiring BG Group last April and has spent the last few months obtaining the required approvals from various regulatory authorities. The deal has already received clearance from competition authorities in Brazil and U.S. and was recently approved by the European Commission after a brief investigation. However, the deal has hit a roadblock in Australia as the country’s antitrust regulator, the Australian Competition and Consumer Commission has decided to delay its decision by about two months to November 12. The ACCC’s main concern is that Shell?s influence in the local LNG market will increase once the deal is complete and the company could resort to suppressing local supply in favor of exporting to more rewarding destinations such as Asia. The company already owns the largest known undeveloped gas reserves in eastern Australia through its 50% stake in Queensland-based Arrow Energy. On the other hand, BG owns the Queensland Curtis LNG project, which started exporting gas early this year. The Australian regulator’s preliminary view is that Shell’s takeover of BG would align Arrow’s reserves with the Curtis LNG plant, with Shell preferring to export LNG instead of meeting domestic gas needs. The lack of supply from Arrow could push up gas prices in the local market. The situation is compounded by the fact that Origin- and Santos -led rival LNG projects will also begin exporting gas in the near future, further reducing the supply in the local market.
Our Views On What’s In Store For Shell
It is not surprising that the Shell-BG deal has hit a roadblock in Australia while securing regulatory approvals with relative ease in Brazil, U.S. and Europe. Australia is significantly more affected by the deal in question and was bound to put the deal through more scrutiny. Shell, for its part, has defended the BG deal to the Australian authority, stating that the merger will lead to accelerated supply of LNG, leaving enough gas for domestic consumption as well as for export purposes. The company has further stated that it will continue to work closely with the regulatory authority in order to dispel any concerns regarding the issue. While the ACCC has called this an ‘amber light concern’, we believe that the authority could ask Shell to divest its stake in Arrow before giving the necessary clearance to the deal.
Shell could face additional heat when the proposed merger comes up for review in China. The country has become an important consumer of LNG over the years and will look to safeguard its interests. The Commerce Ministry, China’s main competition watchdog, has increased its level of scrutiny in recent years, going as far as blocking two deals involving non-Chinese companies in the last few years. The regulatory body rejected a collaboration between three of the world’s largest shipping companies last year even after the collaboration had received European and U.S. clearance.It also made Glencore sell one of its copper mines to a Chinese company before approving the Glencore-Xstrata transaction. Shell also needs to get the deal approved from its shareholders. The company seems confident of getting the required clearances and has repeatedly tried to calm the deal-related fears among the investors.We believe that Shell will agree to the conditions (if any) that are imposed by the Australian and Chinese regulators as the company stands to benefit from the merger in the long run.