Shell-BG Deal Tests China's Antitrust Pledge

Royal Dutch Shell's $70 billion bid for BG Group Plc (BRGXF) will put to the test a pledge by China's antitrust regime to be more transparent, after it faced strong criticism last year from the United States and Europe.

China's nascent competition law has become one of the biggest wildcards for large cross-border deals in recent years, particularly where natural resources are concerned.

In 2013, China's Ministry of Commerce (MOFCOM) said miner Xstrata (XSRAF.PK) had to sell off a prized Peruvian copper project in order for its $35 billion merger with Glencore (GLCNF) to proceed, despite neither company owning any assets in China at the time. The combined company's share of China's copper market was also not high enough to warrant concerns by international norms.

Since then MOFCOM, along with China's two other antitrust agencies, has faced criticism from U.S. and European business lobbies and governments which say China uses its competition law to benefit its strategic interests and protect domestic businesses.

Under this increased scrutiny, lawyers say there is a wish on the part of the agencies to develop a more professional image, which should help Shell's case.

Last December, China said it would enforce its anti-monopoly law fairly, with greater transparency, and would pursue remedies that focus on the threat purely to competition, according to the U.S. Joint Commission on Commerce and Trade.

"MOFCOM is trying to improve transparency in general, and any international case where the world is watching may bring improvements, innovations and possible convergence and cooperation with the rest of the world's antitrust community," said Dave Anderson, an antitrust lawyer with Berwin Leighton Paisner in Brussels.

MOFCOM did not reply to Reuters request for a comment. They have previously defended their actions as being transparent, fair and in line with the law.

Shell's CEO Ben van Beurden said on Wednesday the deal would require a detailed conversation with anti-trust authorities, but was unlikely to lead to forced asset sales.

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Under China's antitrust law MOFCOM can consider whether a merger would impact the country's national industrial goals, an unusual provision that is likely to be key in this case.

As with copper in the Glencore-Xstrata deal, the watchdog will consider the impact of a combined Shell and BG Group's hold over the liquefied natural gas (LNGLF) (LNG) market.

Natural gas is an increasingly important resource for China as it moves to cleaner energy sources. Its consumption is set to nearly double through to 2019, according to a June report by the International Energy Agency.

Shell and BG together would account for 13 percent of China's LNG imports this year rising to 28 percent by 2017, according to estimates by research firm Wood Mackenzie.

Both groups have operations in China, including Shell's production sharing contract with China National Petroleum Corporation, as well as long-term deals to supply China with LNG via other foreign productive assets. BG Group says it will be the largest contracted LNG supplier to China by 2017.

"MOFCOM should look at this deal from a strategic perspective, as natural gas is relevant to China's national security," said Liyong Jiang, a partner at law firm Gaopeng & Partners in Beijing, and a former MOFCOM staff-member.

Still, some lawyers believe the political environment in China has changed over the past two years, making it less likely Shell will have to make a painful concession.

"What's changed since Glencore-Xstrata, is the context: the U.S. has put big pressure on China, and they have said they'll stick to the rule of law," said a Beijing-based antitrust lawyer.

"So now everyone is watching them. Will they go ahead and do it again? I don't think so."

By Michelle Price and Denny Thomas