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BG opens new front in Origin fight

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BG opens new front in Origin fight

By Ed Crooks and Rebecca Sharp

Published: August 20 2008 03:00 | Last updated: August 20 2008 03:00

BG Group has attacked Origin Energy, its Australian bid target, about its plans to set up a joint venture to produce liquefied natural gas, saying the venture would be threatened by delays and cost overruns.

The criticism opens another front in BG’s campaign to win Origin. It is the UK-based gas explorer and producer’s first hostile bid and a vital element of its strategy to expand in the lucrative Pacific region.

Origin yesterday urged shareholders to reject BG’s A$13.8bn (£6.4bn) offer, arguing the company should remain independent to develop its gas reserves.

Grant King, Origin’s managing director, said it was in talks with unnamed international oil groups about a joint venture to convert its coal bed methane into LNG that could be exported to Asian markets.

BP has been looking at Origin’s data, and Royal Dutch Shell and Chevron have been named as possible partners.

However, BG argues that Origin’s shareholders would do better to accept its A$15.50 a share cash offer now, rather than to bear the risks inherent in staying independent.

Ashley Almanza, BG’s chief financial officer, criticised the record of the biggest international groups in developing LNG facilities.

“Look at some of the very large projects the super-majors are involved in [and] there is no guarantee that simply having a large player in the joint venture removes the risk [to Origin’s shareholders],” he said.

“Many of these large projects are late and substantially over budget, and this applies to the big international companies as well as anyone else.”

Shell has suffered long delays and cost overruns at its Sakhalin 2 LNG development off the east coast of Russia, as has Chevron with its planned Gorgon project off Australia’s west coast.

By contrast, Mr Almanza said, BG had delivered seven LNG projects on time and on budget.

He said BG was able to make an offer that was generous to Origin’s shareholders, while still making the deal a commercially attractive proposition, “because we have the skills and experience of delivering these projects substantially better than our competitors”.

Mr King reiterated his company’s strength lay in its gas reserves in Queensland: “We have come late to the LNG process. But our reserves are unparalleled.”

Origin has increased estimates of its gas reserves sharply this year, since BG first made its approach, and now reports proved, probable and possible reserves of about 10.1 petajoules of coal bed methane, or about 10bn cubic feet.

Mr King also said any project to develop its gas reserves for LNG would have an approximate development target of 2014: an objective BG suggested was over-optimistic.

Mr Almanza said: “The alternative to BG’s offer is highly complex, and nobody, least of all Origin’s shareholders, will know for seven or eight years whether they have been successful in striking the right balance of risk and reward.”

In spite of the repeated attacks on Origin’s strategy, its shares have remained above BG’s offer, closing at A$16.10 yesterday.

Coal bed methane – known as coal seam gas in Australia – is a natural gas found in coal deposits. It is the subject of intensifying interest from companies as commodity prices have risen and as technology to extract it has improved.

In May, Petronas of Malaysia paid $2.5bn (£1.3bn) for 40 per cent of an LNG project in Queensland alongside Santos, the Australian energy group, leading to re-evaluations of similar assets. A day after the Petronas deal was announced, Origin rejected BG group’s offer of A$15.50 a share, citing a reappraisal of its reserves.

Origin intends to provide an independent report by experts, including a valuation of its shares, for shareholders to see at least a week before BG’s offer expires on September 26.

Mr Almanza argued this was “pretty unsatisfactory” for Origin’s shareholders, as it gave them little time to decide if the joint venture plan offered better value than BG’s bid.

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