The biggest obstacle to Royal Dutch Shell Plc’s $70 billion offer for BG Group Plc probably lies in China.
Shell Chief Executive Officer Ben Van Beurden visits the country this week to convince officials that the combination of two large oil and gas producers poses little risk for the world’s biggest energy importer.
He’s not certain to succeed given the clout the enlarged company will have in the global market for liquefied natural gas, according to Gordon Kwan, Hong Kong-based head of regional oil and gas research at Nomura International.
“The thing that could potentially tumble out of the closet is BG and Shell’s LNG projects in Australia, which export to China,” Kwan said in a interview. “They might have to divest some stake.”
Negotiations will test Hague-based Shell’s storied relationship with China, which started with kerosene imports in 1894 and today includes a global alliance with PetroChina Co., the country’s biggest oil producer. Van Beurden will be aware that China’s antitrust authorities have challenged major natural resource deals on competition before.
Glencore Plc sold its Las Bambas copper mine in Peru to China Minmetals Corp. for $7 billion as part of an agreement to win Chinese regulatory authorization for its $29 billion takeover of Xstrata Plc in 2013.
BG and Shell both have export projects in Australia that will supply China will gas, and Shell will become the leading player in the global LNG industry after buying U.K.-based BG.
Shell’s LNG sales will rise 80 percent by 2018 and the combined company will account for about 15 percent of the world’s traded LNG, company executives said the day after the deal was announced.
“The deal is pro-competitive, and whilst we expect the usual thorough and professional review by the relevant antitrust and other regulatory authorities, we are confident that the deal will receive the necessary approvals,” Shell said in a statement on Wednesday.
Two calls to the anti-monopoly bureau of China’s Ministry of Commerce went unanswered.
Of all the places Shell needs antitrust approval, which include Brazil, the European Union and Australia, China is most likely to seek concessions, said Jonathan Stern, head of the natural gas program at the Oxford Institute for Energy Studies.
“Sovereign governments are nervous about potential market powers,” Stern said in a telephone interview. “The Chinese may well demand that Shell limit the volumes of LNG that is supplied from their portfolio to China.”
Gas is important for China as the country battles the pollution generated by coal-burning power stations.
The government has set a target of increasing the share of gas in the energy mix to more than 10 percent by 2020 from less than 6 percent in 2013. That would be more than double total gas consumption, Bloomberg Intelligence analysts Joseph Jacobelli and Grace Lee wrote in a March 25 report.
Van Beurden met President Dilma Rousseff last month as well as officials at state-run Petroleo Brasileiro SA, to brief them about the BG acquisition, which will make Shell one of the biggest foreign producers in Brazil. Responses from the government were positive, Van Beurden said on April 30.
China, Australia and Kazakhstan, a country Van Beurden is also scheduled to visit this week, have been “positive and logical” so far, he told analysts on a conference call the same day. The antitrust process is in still in “incredibly early days,” he said.
Shell doesn’t expect to complete the merger with BG until early next year.
Antitrust approvals for a deal of this size in China can typically take at least six months, Peter Wang, partner-in-charge at the Shanghai office of international law firm Jones Day, said by phone.
“On the one hand, the government wants to present itself as a modern, sophisticated jurisdiction regarding antitrust matters and doing things on a fair and principled basis,” Wang said. “On the other hand, they have an interest in protecting their own companies and industry.”