Shell-BG Deal Could Face Bumpy Ride from Partner Rights

Royal Dutch Shell Plc's agreed $70 billion takeover of rival BG Group could trigger pre-emption rights in key oil and gas fields that would erode the potential benefits of the deal for the Anglo-Dutch oil giant.

 

Shell said a main driver of its bid for BG Group was the gas-focused British group's position in Brazil. Two exploration blocks, named BM-S-9 and BM-S-11, account for almost all the value of BG's Brazil assets.

 

But, BG said in its annual report published last week:

 

"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 (BRGXF)".

 

BG and Shell declined to comment on the BM-S-9 rights.

 

When Shell Chief Executive Ben van Beurden was asked about change of control provisions on an analyst call on Wednesday, he said these could trigger pre-emption rights in relation to BG's stake in Karachaganak, a field in Kazakhstan.

 

He did not mention BM-S-9, which contains the Sapinhoa and Lapa fields.

 

Analysts said that failing to secure BG's stake in Karachaganak might not affect the key strategic drivers of the deal. However, not buying BM-S-9 would be a big loss.

 

"Brazil is central to the acquisition," said Neill Morton, oil analyst at Investec (ITCFY). "Sapinhoa is pretty important. It's one that Shell is looking to get its hands on."

 

Block BM-S-9 is estimated to contain billions of barrels of oil that can be extracted at moderate costs. Analysts at Bernstein estimated last month that Sapinhoa could be worth $6.5 billion, while Morton said the Reading-based group's stake in the block could be worth $10 billion.

 

Tom Ellacott, head of the corporate analysis team at research group Wood Mackenzie, said a failure to secure BM-S-9 probably would not be a deal-breaker but would likely force a rethinking of the terms of the deal.

 

Analysts said Petrobras and Repsol may not be keen to exercise their right to buy BG's stake in BM-S-9, due to a lack of funds or strategic impetus, but that Chinese state-controlled Sinopec could mount a bid.

 

"Sinopec has a pretty reasonable position in Brazil and they would probably be keen to increase that further," Ellacott said.

 

John Seaman, Research Fellow with French foreign relations think tank Ifri, said that despite a recent drop in Chinese state-owned energy giants buying overseas, they remained interested in choice assets. He said the current depressed price of oil assets could encourage Sinopec to bid for the Brazil asset.

 

Repsol and Petrobras declined comment. Sinopec was not available for comment.

 

A spokesman for Kazakhstan's energy ministry said he "has no information" on whether the government might seek to exercise a right to acquire BG's interest in Karachaganak, which BG's annual report said may exist if there was a change of control at BG.