Matt Chambers, 18 September 2015

Competition boss Rod Sims has become one of the major regulatory hurdles to the biggest global oil merger in more than a decade, issuing an “amber light” on Shell’s planned $91 billion takeover of BG Group after a separate investigation uncovered poorly functioning east coast domestic gas markets.

An Australian Competition and Consumer Commission decision on Shell’s friendly BG Group takeover, which has been approved by European Union, Brazilian, US and Tanzanian regulators, has been delayed and more submissions called for because of concerns it could restrict domestic gas supply and lead to higher prices by concentrating Queensland onshore gas ownership.

The concerns have been heightened by a separate ongoing investigation into east coast gas markets, where Mr Sims says the ACCC’s ability to look at confidential contracts has finally confirmed gas buyers’ claims that they could not access gas, or sometimes even get reasonable quotes — something that producers had previously denied.

“It’s clear from our gas inquiry that the customers were right, they could not get gas for a certain period at any price, and I think those supply concerns remain,” Mr Sims told The Australian yesterday.

“That is a big find, because that dispute was part of the reason our inquiry was started, to get to the bottom of that (with powers previous inquiries did not have).”

The ACCC said yesterday it would delay a final decision date on the Shell-BG takeover to November 12 because of concerns that if the acquisition went ahead, it may cause Shell to favour sending its Arrow CSG joint venture gas to BG’s Queensland Curtis LNG plant over competing gas users.

“If the proposed acquisition resulted in less supply of gas to the domestic market, this could substantially lessen competition to supply domestic gas users and lead to higher domestic prices and more restrictive contractual terms,” Mr Sims said, adding that a view had not been formed and that more information was being sought.

“To use the parlance, this is an amber light concern.”

The Shell-BG merger is the biggest since today’s oil majors were created in a flurry of M&A activity around the turn of the century after oil prices halved to about $US10 a barrel.

BP took Amoco in 1998, Exxon picked up Mobil in 1999, Total absorbed Petrofina and Elf Aquitaine (1999 and 2000), and Texaco fell to Chevron (2001).

In eastern Australia, domestic gas users are concerned about LNG exports driving gas prices higher and causing potential gas shortages, meaning the ACCC has received “a large number” of submissions citing local concerns around the merger.

At the same time, the ACCC has used its compulsory information gathering powers in its 12-month gas industry inquiry (which is six months in) to validate gas buyers’ claims the market is not working effectively.

“Very few people had any transparency about what was going on in the gas market (before the ACCC gas sector investigation started in April), and you had counter claims on both sides,” Mr Sims said.

“The fact we have now, through getting access to confidential information, got to the bottom of that, has greatly informed our Shell-BG assessment.”

He said the go-ahead of the LNG plants had meant domestic gas buyers had gone from getting an average of between three and five negotiable contract offers when they tried to buy gas to getting one, or sometimes none, on a short-term, take-it-or-leave it basis.

“Hopefully things are freeing up a little bit now, but nonetheless there is a permanent change in the sense that contracts will probably be more short-term and less flexible,” Mr Sims said.

“It raises a policy issue that needs to be addressed.”

The ACCC recognises that whether the Shell-BG takeover goes ahead or not, Arrow, a 50-50 joint venture between Shell and PetroChina that owns eastern Australia’s largest uncommitted gas reserves, would need a big underpinning LNG contract to develop its gas.

But the watchdog is worried that other potential buyers, including domestic gas users, would have less access to any surplus Arrow gas outside the underpinning contract if Shell owned QCLNG.

“The question is, does this transaction change Shell’s incentive around whether it is open to all comers, versus ‘no, we need to make sure we have enough gas for (QC) LNG, so we won’t make it available’,” Mr Sims said.

He said the ACCC would not look at potential remedies to the situation.

“We really need to get to the bottom of how much we have a problem but if the entities themselves want to think about remedies that’s up to them, we won’t be canvassing that,” he said.

A Shell spokesman said Shell and BG would continue to work closely with the ACCC and that the merger remained on track for completion early next year.

“The Shell-BG combination is a sign of confidence in the Australian economy and Shell looks forward to investing more in the Queensland resource sector,” the spokesman said.

He said BG Group had enough gas to support its LNG and domestic commitments.

“Arrow and QCLNG collaboration could assist the development of the Arrow’s undeveloped resources to potentially accelerate additional gas supplies into both the domestic and export market,” he said.

Extracted in full from The Australian.