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Merger of Royal Dutch Shell and BG Group

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Published by Joshua NoonanSeptember 27, 2015

With the declared April 2015 merger of Royal Dutch Shell and BG Group, formerly British Gas, a combination of assets spanning continents is occurring. The completion date of the merger in early 2016 has had some roadblocks. In Kazakhstan’s Karachaganak Field project, the combined group could lead to Shell to hold 29.5% by 2016. Despite this, the government of Kazakhstan may be blocking the transfer of shares.

The Karachaganak Field is a gas condensate field in northwestern Pre-Caspian Basin nearly one hundred miles east of Oral.The Field was discovered in 1979, with production starting in 1984. Upon independence, AGIP, currently Eni, and British Gas, now BG Group won exploitation rights. Thence, in 1997, Texaco (currently Chevron) and Russia’s Lukoil alongside the original signatories and two companies signed a production sharing agreement for forty years. BG Group and Eni possess 29.25% share a peace and Chevron has 18% and Lukoil has 13.%. Upon arbitration and a December 2011 acquisition, KazmunayGas purchased a 10% stake for two billion USD cash and one billion in non-cash consideration.

Recently, First Vice-Minister of Energy Uzakbai Karabalin spoke on the subject of the purchase. “At issue is the state’s right of first refusal for the purchase of shares in this project. The lawyers of the Ministry of Energy and the Ministry of Justice, as well as of other state agencies concerned are researching the possible legal implications of the purchase of BG Group by Shell, and how our laws may be applied to this deal. There is no final answer to this question yet. So we will wait and see.” From First Vice-Minister of Energy Uzakbai Karabalin’s statement, it can be determined that the government of Kazakhstan may wish to exercise its right of refusal.

There are several hurdles to a Kazakh purchase of BG Group’s share. First of all, the cash reserves of KazMunaiGas are limited and thus unable without a transfer of state reserves to purchase the stake. Secondly, the Parliament of Kazakhstan is considering a law which would strip the right of refusal from the charter of KazMunaiGas. KazMunaiGas has historically used its right of refusal. In 2013, it used it to acquire an 8.4% stake of the Kashagan Field held by ConocoPhillips. Much of that stake was thereafter transferred to CNPC, the Chinese national oil company. Thus, some speculate that a similar move could take place as well at the Karachaganak Field.

Currently, it is expected that Kazakhstan and Turkmenistan gas will make up a large portion of Chinese natural gas consumption by 2020. Nonetheless, Chinese demand may slacken as recent OECD GDP growth forecasts display. Moreover, the transition from energy-intensive heavy industries to light manufacturing and services will lead to a lower rate of energy consumption for each portion of growth. This may slacken the need for Chinese investment in additional natural gas capacity. While Chinese interest continues to be focused on Central Asia with its One Road One Belt project, the purchase of a non-controlling stake in the Karachaganak Field may not be in the cards.

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