Australian watchdog raises doubts over BG/Shell merger

The Australian Competition and Consumer Commission has raised concerns that a merger between Royal Dutch Shell and BG Group could boost prices and reduce the supply of natural gas to consumers on the east coast of Australia.

The regulator, which is seeking further submissions from the market before a final decision is made on 12 November, noted that Shell possessed the largest quantity of uncommitted gas reserves in eastern Australia and there are a limited number of other potential suppliers to the domestic market.

"If the proposed acquisition resulted in less supply of gas to the domestic market, therefore, this could substantially lessen competition to supply domestic gas users and lead to higher domestic prices and more restrictive contractual terms,” it said.

The ACCC’s chairman, Rod Sims, said: “The ACCC is concerned that, by aligning Shell's interest in Arrow Energy with BG's LNG facilities in Queensland, the proposed acquisition may change Shell's incentives such that it will prioritise supply to BG's LNG facilities over competing gas users."

He said that as a result, Shell could end up directing more and maybe even all of Arrow’s large gas reserve towards meeting BG’s contracts to supply LNG export markets, which would remove some or all of Arrow’s gas from the domestic market.

Shell has a 50% stake in Arrow Energy Arrow Energy, while BG holds a majority stake in the Queensland Curtis Liquefied Natural Gas project.

At the beginning of this month, the European Commission gave unconditional merger clearance to Shell for its £47bn recommended cash and share offer for BG.

It concluded that the takeover would not lead to Shell benefiting from market power in a number of markets, namely oil and gas exploration, the liquefaction of gas and the wholesale supply of liquefied natural gas.

RBC Capital Markets said it expects Shell to find a solution to the issue, whether it be divesting a portion of Arrow or committing to developing a portion of the reserves for domestic sales, with the remainder for exports.

“Ultimately, with Arrow having effectively been on the back burner for a while now, the BG deal could actually accelerate development and therefore be positive from Australia's perspective,” said the Canadian bank.

At 0814 BST, BG shares were up 0.3% at 1,019.50p, while Shell was down 0.1% at 1,670p.