Shell and BG Group Merger

Wed, 01/21/2015 - 13:27

The purchase of BG Group by Shell rattled oil and gas markets worldwide. However, to the astute observer or careful market watcher, the news may not have been a major surprise. BG Group had been earmarked as one of the major oil and gas acquisition targets, as its status as Brazil’s leading private operator, alongside other advantages, made it a good purchase. For Shell, the sheer amount of reserves that BG Group brings to the table, around 17 billion barrels of oil equivalent, also helped to turn it into an attractive buy. Furthermore, BG Group has been doubling down on natural gas around the world, including in China, which coincides well with Shell’s plans for the future.

Shell seems to be betting on LNG to anchor its long-term developments, but analysts are not unanimously convinced about this move. Despite prices remaining solid in the US, the natural gas market worldwide is not in great shape.

Spot prices in Asia are less than half their price from a year ago, falling to below US$8 per million Btu and marking a 59.8% drop year-on-year. China is partly to blame for this stalling, with its demand for LNG being significantly lower than expected. This might not be a significant issue if other markets were ready to make up the difference, but supply development is exceeding the demand growth. As more natural gas wells are set to start producing in the next few years, the risk of downward price pressure remains. “Shell is betting that a growing trend toward cleaner energy and lower emissions will position natural gas as the key source of global energy for decades to come,” writes NASDAQ. BG Group is a significant addition to Shell’s portfolio but the combined powerhouse will still not top the IOC rankings. BG Group’s output stood at about 20% of Shell’s in 2014, with the two combined producing an average of 3.7 million boe/d in 2014, while ExxonMobil’s production stood at approximately 4 million b/d of boe.