Shell, BG, Conoco May Combine Australia Gas Projects

Australia’s proposed resource tax may prompt Royal Dutch Shell Plc, ConocoPhillips, BG Group Plc and Santos Ltd. to merge as much as $70 billion of gas projects targeting fuel shipments to China, Japan and South Korea.

The government’s 40 percent tax on profits, starting in 2012, may reduce returns from the ventures that will tap coal- seam gas in Queensland for export as liquefied natural gas. That will make them less viable on their own, said Nik Burns, an analyst at RBS Morgans in Melbourne.

“It certainly increases the likelihood of consolidation, given that it reduces the rate of return for all of these projects,” he said in a phone interview. “You have to extract as much cost-savings as possible.”

BHP Billiton Ltd., the world’s largest mining company, Rio Tinto Group and Xstrata Plc are reviewing Australian projects after the government announced the tax plan on May 2. Santos and Origin Energy Ltd., ConocoPhillips’ partner in one of four proposed Queensland LNG ventures, have said they may delay investment decisions.

The most likely scenario is Santos combining its LNG project with the venture proposed by Shell and PetroChina Co., Burns said. Origin and ConocoPhillips may also merge their development with BG’s venture, he said.

Photographer: Tim Boyle/Bloomberg

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Photographer: Tim Boyle/Bloomberg

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“Ideally, all of these projects now would come together in a single mega-project,” said Burns, who correctly forecast in February that Shell may bid for Arrow Energy Ltd. “That would lead to the most cost savings and from a workforce perspective in particular would make most economic sense.”

Link to Bonds

Returns from the ventures exceeding the rate on long-term Australian government bonds, currently less than 6 percent, would be taxed as “super profits” under the proposal, analysts said. LNG projects based on gas from offshore fields are already covered by Australia’s 23-year-old petroleum resource rent tax.

Gas producers in Queensland had based their projects on the assumption that they would pay 10 percent royalties levied on production, Gordon Ramsay, an analyst at UBS AG in Melbourne, said in a May 7 report. Under the government proposal announced May 2, they would be subject to the 40 percent tax on super profits, while the government would refund the royalties. The corporate tax rate would fall to 28 percent from 30 percent.

The tax is an “unnecessary and risky” step at a time when the Queensland LNG projects are advancing toward the approval stage, Santos said May 6. Santos still expects to make a decision this year to go ahead with the project.

Malaysian Partner

Australia’s third-largest oil and gas producer owns 60 percent of the Gladstone LNG venture, while Malaysia’s Petroliam Nasional Bhd., or Petronas, holds the remaining 40 percent.

Origin said last week the tax may delay the development of Australia Pacific LNG and boost costs.

The coal-seam gas ventures have signaled they are willing to work together. Origin and ConocoPhillips agreed this year to sell gas to BG’s project.

ConocoPhillips is open to collaboration, James Mulva, chief executive officer of the third-largest U.S. oil company, said April 29.

Once the developers have a better grasp of the tax, they may discuss consolidation to reduce risks, including sharing gas pipelines, said Di Brookman, an analyst at CLSA Asia-Pacific Markets in Sydney.

“If it takes a significant amount of value off the table I think you’ll see increased probability that outcome could occur,” Brookman said by phone. “We all know when things get harder people are more likely to sit down and talk.”

‘Add Value’

If all four projects were to proceed, they may cost A$80 billion, according to an estimate from Burns of RBS Morgans.

BG will “pursue opportunities to add value provided they do not compromise our ability to deliver” a project with two LNG processing units, said Mark Todd, a spokesman for the company’s Australian subsidiary based in Brisbane.

Jeremy Milne, a spokesman for Santos, said the Adelaide- based company remains focused on progressing its own project with two production units. Phil Connole, a spokesman for Shell in Melbourne, declined to comment. Paul Turner, a spokesman for the Origin project in Brisbane, didn’t return a call.

Santos shares rose 1.7 percent to A$13.15 in Sydney, while Origin increased 2.4 percent to A$15.75. The benchmark S&P/ASX 200 Index climbed 1.8 percent. Santos has fallen 5 percent and Origin has dropped about 3.8 percent since April 30.

Asian Market

Sales to Asia will underpin Queensland’s LNG industry, even if the tax eats into profits, said John Young, an oil and gas analyst at Wilson HTM Investment Group in Melbourne. “The tax doesn’t change Asian demand -- that will continue.”

PetroChina and Shell agreed in March to acquire Australian coal-seam gas producer Arrow for A$3.5 billion. China National Offshore Oil Corp. signed Australia’s biggest LNG deal the same month, agreeing to buy 20 years of fuel supplies from BG’s venture.

Shell may not be done making deals in Australia because the quality of Arrow’s gas holdings may fall short of underpinning a large LNG venture, Aiden Bradley, an analyst for Goldman Sachs JBWere in Sydney, said in a May 10 report.

“We view the Arrow acquisition as only the first step for Shell/PetroChina,” he wrote.

To contact the reporter on this story: James Paton in Sydney jpaton4@bloomberg.net.

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