Shell’s acquisition of BG is the oil equivalent of the play Waiting for Godot.
After every merger specialist in Shell looked at it at some stage of their career, rumours of such a deal surfaced in 1996, 1999, 2000, 2002, 2004, 2005, 2006, 2007, 2008, 2009, 2010, 2012 and 2014. But Godot finally arrived last Wednesday, when BG agreed to Shell’s £47 billion (Dh252.6bn) offer for the company.
Does this herald a return to the turn-of-the-century era of mega-mergers that produced ExxonMobil, ChevronTexaco, TotalFinaElf, BP Amoco and ConocoPhillips? Or will future oil sector deals be something quite different?
Shell-BG is a unique fit. By the end of the decade, the combined company will be the corporate world leader in liquefied natural gas, with 45 million tonnes per year of sales, more than half as much as Qatar. It will be the world’s third-biggest gas producer after the state giants Gazprom of Russia and National Iranian Oil Company, and it will be the largest foreign oil producer in Brazil.
BG, although a fifth the size of Shell, has big-company assets – a concentrated portfolio of large, long-life projects. Even if some pose major headaches to management, a few large headaches are easier to cope with than many small irritations. The deal bets on both companies’ strength – developing and trading gas, which is clean, abundant, affordable, fast-growing and far less closed than oil to private investment.
Along with last year’s purchase of Repsol’s LNG assets, BG will give Shell a strong position in Atlantic LNG supplies to complement its already leading role in the Pacific. The company will also be one of the top players in Kazakhstan, Australia and Egypt, and Shell will gain entry in Tanzania to the exciting East African gas story.
High-flying BG’s struggles with gas shortages in Egypt, the Petrobras shambles in Brazil and the falling oil price have brought down its valuation to a level where Shell could justify paying a 52 per cent premium. Of course, assuming it passes regulatory hurdles, and despite all the strategic sense, the deal’s financial success will still hang on the anticipated recovery in oil prices – and especially the end of the current LNG glut.
No doubt other consolidation in the sector is coming, under the pressure of low oil prices and the supermajors’ difficulties in finding organic growth. But such deals are unlikely to follow the mega-merger pattern. Continental European groups such as Statoil, Total and Eni are jealously guarded by national governments. With the poison pills of its stake in Russia and the remaining liabilities of the Macondo disaster, BP is not a position either to buy or be bought.
ExxonMobil’s US$41bn buy of XTO in 2010 has produced mixed results at best. The supermajor oil companies have in general struggled to shine in shale, where the mini-major ConocoPhillips is concentrating following the spin-off of its downstream unit. It is also hard to see that the large companies would manage a skilled mature field operator such as Apache much better.
Instead, further deals are likely to look entirely different from Shell-BG, and to focus on the small and mid-cap sectors. Smaller companies in financial distress will be snapped up, and a few lucky explorers such as Gulf Keystone in Kurdish Iraq will eventually be bought out when politics and valuations align; $46bn Anadarko, with big discoveries in East Africa, does look like a possible target for a supermajor. Perhaps a shale super-independent will emerge in North America around a nucleus of Chesapeake, EOG, Continental or Devon.
Although exciting for investors and bankers, mega-mergers do not do much to address the industry’s problems of excessive costs, skills shortages and poor project delivery. For now, investors eagerly anticipating ExxonTotal or ChevronBP are likely to have to wait a lot longer.
Robin Mills is the head of consulting at Manaar Energy and the author of The Myth of the Oil Crisis
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