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Shell-BG Group Deal Faces Hurdle From Chinese ‘Black Box’ Regulator

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By: MICHEAL KAUFMANPublished: May 29, 2015

Royal Dutch Shell Plc’s (ADR) (NYSE:RDS.A) deal to acquire the UK-based BG Group (OTCMKTS:BRGYY) that is already at a risk of facing numerous obstacles, including volatility in the crude oil prices and a risk of a competitor outbidding Shell’s bid.

Meanwhile, when the deal is already hovering around such sensitive issues, the Financial Times (FT) has reported the latest hurdle that might hinder the course of the deal. This one is considered to be the biggest of all hurdles, the entry of China’s Ministry of Commerce (MOFCOM), termed as ‘black box’ by one of the competition lawyer, to conduct a regulatory scrutiny of the deal.

Considering the size of the deal, being the biggest energy sector deal in over a decade which is set to make the combined company the world’s biggest supplier of liquefied natural gas (LNG), it is believed that the scrutiny by the country’s antitrust regulator might take up to several months. Moreover, rival authorities of Australia, Brussels and Brazil are also expected to scrutinize the reach and size of the combined company.

Shell and BG already accounted for 20% of the global LNG supplies last year, quantifying to 45 million tons. Analysts believe that the combined company would raise concerns for Beijing, being a substantial sized LNG importer, regarding the impact of the biggest supplier on the industry as well as the security of the supply.

As per FT, lawyers consider MOFCOM’s intervention in the deal as the biggest uncertainty. They believe so because of the wide criteria that China follows for competition testing and how unpredictable has been the approval process in the past.

Experts further believe that China might approve the deal, but would also demand concessions like it did with the Glencore International PLC, St. Helier (OTCMKTS:GLNCF) and Xstrata PLC (ADR) (OTCMKTS:XSRAY) deal two years ago.

A senior oil industry executive told FT that he would not be surprised if the Shell and BG are asked to give up one of their grade one LNG assets, just like Glencore and Xstrata were asked to sell their Las Bambas mining project in Peru to a group of Chinese companies.

This demanding behavior of MOFCOM before approving such deals is also highlighted by competition lawyers. One lawyer mentioned another example when Thermo Fisher Scientific Inc (NYSE:TMO) acquired Life Technologies, the demands by MOFCOM included supply commitments as well as price reductions on some products.

The combined entity of Shell and BG is expected to be an LNG monster, which will have unbeatable equity production in Qatar, Russia, Brunei, Peru, Oman, Malaysia and Australia. Alongside, the company will also possess an unmatchable transport network and supply contracts trading positions like no other industry player. A strength, which is only expected to be possessed by Shell-BG, would be the substantial capacity of turning super-cooled LNG into gas again.

Editor of Global LNG Markets, Ed Cox at ICIS told FT that merger of the currently first and fifth market share holders would emerge as undoubtedly the biggest ever LNG producer in the world. He added that in today’s market when production is experiencing a constant growth, the scale of the combined entity would be a definite advantage in terms of geographical reach and accessibility of vessels, which would in turn leave shorter delivery distances and, as a result, will reduce costs.

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1 Comment on “Shell-BG Group Deal Faces Hurdle From Chinese ‘Black Box’ Regulator”

  1. #1 iakovos
    on May 30th, 2015 at 11:35

    Russia vs Turkey : The Geopolitics of the South & the Turk Stream Pipelines

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