Shell Deal Puts BG Gas Holding at Risk
Kazakhstan Could Exercise Right to Buy Out Stake in Karachaganak Field
LONDON—Buried deep in BG PLC’s annual report is a little-noticed risk for its $70 billion merger with Royal Dutch Shell PLC: The deal could cost Shell a huge Kazakhstan gas field.
In the event of a change in BG’s ownership, the company said in its 2014 report, the Kazakhstan government may claim it has the right to buy out a BG stake in a natural-gas field called Karachaganak that has been a cash cow. It accounted for about 15% of BG’s total production volume and 9% of its $19 billion in revenue in 2014.
The Kazakh government hasn’t disclosed whether it would seek to take over the field or let the Anglo-Dutch energy company keep it after the tie-up’s expected closure in 2016. But the Central Asian nation has exercised its so-called pre-emption rights over resources in the past.
Kazakhstan’s potential rights are among several regulatory risks to Shell’s takeover of U.K.-based BG, which would vault it far ahead of its competitors in the production and sale of liquefied natural gas. Shell also faces potential objections in China, Australia and Brazil, where it could face competition questions as a dominant player in those markets.
BG executives said Shell was handling regulatory approvals for the deal. Asked whether Shell was concerned about Kazakhstan claiming the field, a Shell spokeswoman said that the deal was “pro-competitive” and that the company was confident it would receive the necessary approvals.
A spokesman for Shell said Chief Executive Ben van Beurden traveled to Kazakhstan last month, but the spokesman declined to provide any details.
Kazakhstan’s Energy Ministry said Shell and BG hadn’t provided any information about the matter. “Therefore currently, the ministry has no update on the transaction and the existing agreements between the companies,” Kazakhstan’s first deputy energy minister, Uzakbai Karabalin, said in a written statement.
Karachaganak, in northwest Kazakhstan, is one of the world’s largest gas-condensate fields, with estimated resources in place of nine billion barrels of condensate and 48 trillion cubic feet of gas.
Only 10% of those resources have been produced from the field and significant development opportunities remain, BG said in the report.
Last year, production from the onshore field net to BG was 85,000 barrels of oil equivalent a day. Condensate is a type of valuable ultralight crude oil that is mostly a gas when it is in the ground, but condenses into a liquid when pumped to the surface.
“Karachaganak has been a good cash cow for BG,” said Brendan Warn, senior oil-and-gas analyst at BMO Capital Markets.
Analysts have valued BG’s 29.25% stake in the Kazakh gas field at roughly $4.4 billion based on an oil price of $80 a barrel. An additional 22 years remain on the concession.
In 2013, Kazakhstan’s government exercised its pre-emption rights at the Kashagan oil field, buying ConocoPhillips’ stake in the project for about $5 billion before selling it on to China’s National Petroleum Corp. Conoco had initially planned to sell its interest in Kashagan to India’s Oil and Natural Gas Corp.
Kazakhstan’s oil and gas company, KazMunaiGas, currently holds the smallest stake in Karachaganak among several partners: 10%, acquired in 2012.