The most valuable BG Group (BG., Financial) gas field in Kazakhstan might be lost to the government if Royal Dutch Shell (RDS.A, Financial) and BG merger ever happens. Ranking second in terms of production in oil equivalents a day during 2014, the Kazakhstan field has been a cash cow for BG last year. The government regulations in Kazakhstan favor the right to claim the gas field of Karachaganak by the government in the event of the merger. The Kazakhstan government has in the past bought 8.4% stake owned by ConocoPhillips (COP, Financial) for $5.4 billion in the year 2013.
Pros and cons of merger:
- With the merger happening, BG & Shell together will now become the world’s largest LNG producers.
- Existing Market disequilibrium in LNG Markets poses severe risks.
- BG in its annual report states that there is a possibility for the republic of Kazakhstan in claiming to have a right to acquire, as per the final petroleum sharing agreement, to operate one of the world’s largest condensate fields at Karachaganak.
- Since no claim has been made yet, there is also a possibility of the Republic of Kazakhstan permitting BG-Shell Anglo Dutch Company to continue operation even after the closure of the tie-in at the end of 2016. If the gas field still remains with BG after the merger, then it will be a huge bonus as the gas field's full potential is yet to be uncovered. As per a statement in BG’s annual report only 10% of the total potential has been realized till date and there is more to be realized. With a total capacity of 48 trillion cubic feet of gas and 9 billion barrels of condensate, it will continue to remain a cash cow to the BG Shell combination and will be extremely beneficial to the merger deal. With the current stake of around 29.25% in the gas field and if $80 per barrel price is considered the total stake amounts to around $4.4 billion.
- Even authorities for regulations in Australia, Brazil and China have also expressed concerns regarding the size of the merger siting dominance over the market by the companies and lack of competition.
- Risk of obtaining approvals from authorities of all the countries will be high for the merger to materialize.
- Shell is still optimistic and is eyeing to get all the required approvals and states that the merger is pro-competitive.
Handling of legal issues
Shell has taken complete responsibility of dealing with the legal issues regarding the merger, and Shell Chief Executive Ben van Beurden had scheduled a visit to China to get the necessary approvals and also states that the regulators in all the nations from China, Australia, Brazil to Kazakhstan have been positive and logical. But, the Chinese may demand limiting of volumes of LNG from Shell’s portfolio to China. With China still holding a track record of challenging high profile deals that poses severe treat to the merger the future stills seems to be gloomy.
At the end
Though the chances are high that the merger would take place by the end of 2016, Shell might lose some highly valuable assets of the BG group. BG Groups cash cows might have an ill impact due to the objections if any by the regulatory authorities in the nations where it operates. Even after considering all these, the merger is still a good deal as it will give Shell the opportunity to become one of the largest producers of LNG and with which it can have a significant impact on the world LNG market.
