July 4 (Bloomberg) -- Origin Energy Ltd., Australia's biggest producer of gas from coal seams, told shareholders to reject BG Group Plc's A$13.8 billion ($13.3 billion) hostile takeover bid because it undervalues the company.

The A$15.50 a share all-cash offer announced June 24 doesn't reflect the true extent of its gas reserves, Sydney- based Origin said in a statement to the Australian stock exchange today. The bid is 4.8 percent lower than Origin's closing price yesterday.

Origin's board spurned a previously agreed approach from BG, the U.K.'s third-largest oil and gas producer, after doubling its coal-seam gas, or CSG, reserves. Origin said the decision by Petroliam Nasional Bhd., Malaysia's national oil company, to pay $2.51 billion for a stake in a rival LNG project being developed by Santos Ltd. showed its resources were worth more.

``This has got a while to run yet,'' said Paddy Costigan, a Melbourne-based analyst for Tolhurst Group, which has a ``hold'' recommendation on Origin stock. ``I don't think BG will increase its offer for a while. We're thinking an offer of A$17.50 to A$18 may get them over the line, particularly in this bear market.''

Origin has risen above the offer price as investors bet the bid may be increased to win shareholder support, and touched a record A$16.49 on June 25. Origin closed 13 cents, or 0.9 percent, lower at A$16.15 in Sydney today.

`Increasing Dramatically'

``The value of CSG is moving very quickly and the reserves base is increasing dramatically,'' Origin Managing Director Grant King said in a Bloomberg Television interview in Sydney today. ``The board formed a view on May 30, and continues to hold the view, that the bid at A$15.50 doesn't appropriately value the company.''

BG took its offer direct to shareholders after Origin rejected the bid in May. Reading, England-based BG wants Origin's coal-seam gas, or CSG, resources in east Australia, which may feed a proposed liquefied natural gas project supplying utilities in northern Asia.

``Origin must spend a significant amount of time and money to prove up its coal seam gas potential,'' BG Chief Executive Frank Chapman said in a statement on today in response to the Australian company's comments. ``Origin continues to lag its competitors in the exploration and appraisal of its CSG acreage.''

Higher Offer

BG's offer values Origin 48 percent higher than when it first bid April 30. The U.K. company may have to increase its offer, Merrill Lynch & Co., Credit Suisse Group, ABN Amro Inc. and JPMorgan Chase & Co. said last week.

``We have by far the largest reserves in the industry,'' King said on a conference call from Sydney today. ``BG's rejection of the Santos deal as a benchmark is entirely self- serving.''

BG, the largest supplier of LNG from the Atlantic Basin into Asia, in February formed a venture with smaller coal-seam gas producer Queensland Gas Co. to build an A$8 billion LNG export project in Gladstone. The venture is one of five rival projects in the northeastern Australian city based on coal-seam gas, which hasn't previously been used as a fuel for LNG.

Origin is inviting expressions of interest in its coal-seam gas reserves, with the deadline for proposals to expire today, it said in a statement.

`Gas Excitement'

``The interest is in our CSG'' reserves, King said in the interview. ``That's where the excitement is. The process we're conducting we hope will attract a number of participants.''

Demand for the fuel is set to increase by 10 percent a year through 2015, more than five times the estimated gains in crude oil, as power producers switch to cleaner fuels than coal, according to Citigroup.

LNG is gas chilled to liquid form for transportation by tanker. Chinese oil companies plan to build more than 10 LNG terminals along the coast to meet a government target of doubling gas use by 2010.

Coal-seam gas, mostly comprising methane, bonds as a thin film on the surface of coal and is released when pressure is reduced, usually after water is removed.

Origin today said it bought the 640 megawatt gas-fired Uranquinty Power Station for A$700 million from Babcock and Brown Power, and committed to proceed with the 550 megawatt Mortlake Power Station, estimated to cost A$640 million.

The acquisition is part of Origin's efforts to position itself as a leading provider of gas-fired power production in Australia, where a government adviser today recommended the country introduce emissions trading as an ``urgent'' remedy to address climate change.

``We've had the benefit of building a business over the last 8 years, mindful that eventually society would want to do something about climate change,'' King said in the interview. ``We feel very supportive of the direction public policy is taking.''

To contact the reporter on this story: Jason Scott in Perth at Jscott14@bloomberg.net; Shani Raja in Sydney at sraja4@bloomberg.net.

Last Updated: July 4, 2008 03:11 EDT