Shell and PetroChina launch Arrow Energy bid

Oil and gas major Shell and Chinese energy group PetroChina have issued a joint bid to purchase Queensland’s Arrow Energy in a widely anticipated move to consolidate Shell’s efforts in the Australian coal seam gas (CSG) sector.

Shell and PetroChina offered A$4.45 (US$4.07) cash per share, plus one share in a new entity comprising Arrow’s international business, Arrow Energy said in a statement released to the Australian Stock Exchange on Monday.

The total cost of acquisition is expected to amount to A$3.26bn, with market observers suggesting the breakdown to be 50:50, and PetroChina entitled to offtake 50% of the project’s output. Shell confirmed the takeover talks in a release on Monday. However, a spokesperson for the Anglo-Dutch energy group declined to comment further.

“At this stage, the Arrow board recommends shareholders take no action in relation to their Arrow shares,” Arrow Energy said in a statement.

The offer comes as little surprise, as Shell already holds a 30% stake in Arrow’s CSG tenements and 10% of its international business. The major has also been seeking gas supplies in order to strengthen its position in the CSG-LNG sector with its proposed 16m tonnes per annum (mtpa) four-train project at Curtis Island.

“PetroChina has been rumoured to be courting Australian resource-holders, so it is a very strategic move for them to team up with a major like Shell, which has been operating in Australia for a long time,” said Tony Regan, principal consultant at Tri-Zen.

China is no newcomer to acquisitions in Australia’s growing energy sector. In June 2009, China was prevented from concluding a multimillion-dollar deal with Australian mining firm Rio Tinto on the basis that the deal could give China too much control over Australian reserves – and, therefore, powerful political leverage in Australia’s policies.

Regan felt that the companies “have come to the table with a very attractive proposal with technology, and a good track record from Shell, in addition to a potentially strong offtaker, PetroChina”.

The Singapore-based consultant said there could be a competitive counter bid, possibly from other majors looking to increase their exposure to CSG-LNG in Australia.

“ExxonMobil could potentially show interest, but it might not tie up with an offtaker like Shell did. It could instead continue on the more conventional approach of lining up buyers before taking final investment decision, expanding on the successes it experienced with the Papua New Guinea LNG project,” Regan said.

A threat to Fisherman’s Landing?

The deal could place in doubt the planned 1.5mtpa Fisherman’s Landing CSG-to-LNG project, which is set to be acquired by Arrow Energy from developer LNG Ltd.

Market observers told ICIS Heren that the outstanding memorandum of understanding to sell 1.5mtpa or the entire production of train 1 to Toyota Tsusho could potentially be nullified if the acquisition by Shell and PetroChina goes ahead.

“There is a possibility that Shell could ditch [Arrow’s] existing Fisherman’s Landing plan, and use the site for a bigger LNG plant. This would be a way of accelerating their project beyond the other CSG-to-LNG proposals,” a source told ICIS Heren.

“There are currently four LNG plants, a total of eight LNG trains, planned for construction on Curtis Island. That would be construction on a scale [seen over] the last few years in Qatar – on an island not even connected to the mainland by a bridge, which would present a huge logistical challenge.”

Arrow Energy is in the midst of concluding a deal that could see the company acquire the entire Fisherman’s Landing plant and associated infrastructure, through the acquisition of LNG Ltd subsidiary Gladstone LNG.

Arrow Energy’s CSG assets would provide much of the necessary gas supplies for Shell’s proposed Curtis Island project, but the latter company might need to prove up more gas in its existing acreage or acquire more reserves to support its planned project.

Regan suggested that Shell could be looking to acquire more acreage from Arrow Energy’s partners (such as AGL Energy, for example, which is a 50% partner in the Moranbah CSG field).

The Australian Financial Review reported that AGL might join Shell in the LNG project in Queensland if Shell’s bid for Arrow Energy were to succeed, quoting AGL CEO Michael Fraser.