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ALEX BRUMMER: Oil pressure surges at Shell as it determinedly presses ahead with its bid for BG Group

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The price of Brent crude oil continues its relentless slide on global markets and is now at its lowest level for 12-years, and there is no reason at all to think that it has hit rock bottom.

This has serious implications for Shell as it determinedly presses ahead with its bid for BG Group, formerly the exploration arm of the ‘old’ British Gas.

With each fall in the oil price the value of Shell shares, down 2 per cent in latest trading, takes a hit and the shape of the offer for BG changes. When Shell set out to buy BG in April the oil price was $67-a-barrel and it is now near enough half that.

As the Shell share price has tumbled the paper element of the deal has become less and the cash element of £13billion more, representing almost one-third of the offer price. So the idea that this is largely a paper transaction, with BG investors swapping their shares for Shell and a bit of cash, becomes misleading.

There is no reason to think that the oil market will improve at all in the coming months or even years. Supplies are so plentiful at present that there are tankers criss-crossing the oceans filled to the gunnels with nowhere to unload because the onshore storage and refining capacity simply does not exist. 

As one leading market participant told me this week, we are getting very close to the point where oil, at the drilling sites, will have a negative value, because the pumpers of the oil will have to pay the business further downstream simply to take it away.

And with Saudi Arabia and Iran at loggerheads, a proxy war is under way in oil production. Tehran is moving swiftly to take advantage of the lifting of sanctions which have blocked Iranian oil sales to Europe, with the ClubMed countries among the big takers. The lack of any unity in Opec means we will have more of the same, with both producers pumping away with real abandon.

In a rational world the Shell board would be asking its lead investment bankers, Bank of America Merrill Lynch, whether there was some means of adjusting the shape of the deal to make it more palatable to its shareholders. As far as one can gather, Shell doesn’t work like that. It tends to depend on advice from its internal merchant bank (consisting of up to 100 people) who have been doing much of the heavy lifting on the transaction.

The difficulty is that this group is very likely to tell finance director Simon Henry and chief executive Ben van Beurden what they want to hear: the show must go on.

At the very least the two companies should be considering adjusting the price at which the deal was done, and maybe the percentage of the cash element.

The claim is that this is impossible because of the rules of the takeover code. If the clock were stopped, goodness knows what would happen and Shell would have to wait for a requisite cooling off period before coming back with a new package. That, in the view of some of the advisers, would be dangerous because it might open the door to BG being bought by another buyer with the Chinese often mentioned.

That, it is said, would be a far worse strategic outcome.

It is an argument with validity but by no means decisive because a new buyer would, like Shell, have to jump through many regulatory approval hoops and might not find, say, Australia as accommodating as the Beijing authorities.

Moreover, it ought not to be beyond the wit of the companies and their advisers to seek a meeting with the Panel, made up of eminently sensible people, to see if some kind of change of circumstances clause or precedent could be invoked.

Pressing on regardless, with a leaky deal, is not an option shareholders should tolerate.

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