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Shell might have missed out on the mega merger wave in the late 1990s due to its complex shareholding structure but it won't let history repeat itself. Now, Royal Dutch Shell is buying out the BG Group in a $70-billion deal, the first major oil sector merger in about a decade.
The companies, in a regulatory filing on the London Stock Exchange, said Shell would pay a mix of cash and shares that valued each BG share at 1,350 pence ($20), a premium of 52 per cent to the 90-day trading average for BG. As of April 7, BG's market capitalisation stood at $46 billion, while Shell's was $202 billion.
Exxon, the world's largest oil company by market value, was worth $360 billion.
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The merger will add about 25 per cent to Shell's proven oil & gas reserves and 20 per cent to its production, on the basis of data from 2014. It will also provide Shell enhanced positions in competitive new oil & gas projects, particularly in Australia liquefied natural gas (LNG) Brazil deep-water.
Both BG Group and Shell have operations in the Indian energy sector. Manvendra Jain, head, public and corporate affairs, BG India, said, "This is a corporate acquisition and all BG assets will be included."
Shell, which has already invested about $1 billion in India, is the only global major to have a fuel retail licence in the country. The company has a marketing licence from the Centre to set up a network of up to 2,000 fuel retail stations in India. Currently, about 75 of its fuel retail outlets are operational. Shell also operates the Rs 3,000-crore Hazira LNG storage and re-gasification terminal. Besides being a major private supplier of crude products, chemicals and technology to public and private sector oil companies, it also has key interests in the lubricants and bitumen segment.
"With BG, Shell now has a bigger play in the Indian energy sector, the most important being BG's Mahanagar Gas Ltd (MGL). BG's exploration and production blocks will also give Shell a presence in the upstream segment," said a senior official at Oil and Natural Gas Corporation (ONGC), which partners BG in the Panna Mukta and Tapti oil & gas fields.
BG Group has 30 per cent interest in the mid and south Tapti gas fields and the Panna/Mukta oil & gas fields, while ONGC holds 40 per cent stake and Reliance Industries holds 30 per cent stake.
MGL, BG's only substantial asset, is considering raising about Rs 800 crore in a stock market listing. The company, a joint venture between GAIL (India) Ltd and BG Group Plc, has already connected more than 700,000 households and about 2,300 small commercial and industrial establishments.
It also supplies compressed natural gas to 370,000 vehicles in Mumbai and beyond.
BG has also entered into an agreement with Gujarat State Petroleum Corporation (GSPC) for the supply of 1.25 million tonnes per annum (mtpa) of LNG from 2015 for up to 20 years; this could be increased to 2.5 mtpa after two years.
BG Group is the operator of exploration block MB-DWN-2010/1 in the Mumbai Basin, off the west coast. Its 50 per cent partner in the block, BHP Billiton, quit India operations in 2013. BG Group is also the operator and 30 per cent partner in exploration block KG-DWN-2009/1 in the Krishna-Godavari basin (deep water).
"BG had withdrawn substantially in India. The assets BG held were not generating much value and it wasn't looking at expanding its portfolio. This deal provides a real exit to BG," said an energy consultant at a large consulting firm on condition of anonymity, as such firms refrain from commenting on deals.
In January 2012, BG had sold stakes in two offshore exploration blocks - in the Krishna Godavari and Mahanadi basins. It had agreed to pay ONGC $50 million for failing to fulfil its drilling commitments.
In October 2012, it sold 65.12 per cent stake in Gujarat Gas Company Ltd (GGCL) to GSPC for Rs 2,464 crore. BG's shareholding was acquired by Gujarat Distribution Networks, in which the GSPC Group held 100 per cent stake. BG had acquired majority stake in GGCL in 1997, for Rs 170 crore.
BG's merger with Shell will give the latter access to BG's multi-billion dollar operations in Brazil, East Africa, Australia, Kazakhstan and Egypt, which account for some of the world's most ambitious LNG projects.
Christian Stadler, associate professor of strategic management, Warwick Business School, UK, said: "Just as in the late 1990s, the oil price has plummeted, though then, it had reached $10 a barrel. Now, it is at around $50. With cost pressures, acquisitions are an obvious way of maintaining growth. BG would fit well with Shell's portfolio. Shell has a very good track record in offshore oil and gas fields, and BG will help it solidify this area."
Since June last year, crude oil prices are down 47 per cent - from $109 a barrel to $58 a barrel.
Stadler added: "With quite a few oil companies under cost pressure, with no sense of oil prices recovering, companies were used to $100 a barrel. Many need $40-60 to break even. So, we could see more such deals."
