Unanswered questions

Shell’s reserve replacement ratio fell to 26pc in 2014, its lowest since 2007. How the company would address that little problem was one question that was answered today — a 25pc boost to proven reserves from buying BG, the consummation of a courtship that has been gossiped about for decades.

But plenty of other questions remain. The big one is whether the deal will go through. BG traders thought something was in the wind, but they expected ExxonMobil to be the buyer. And who is to say it won’t be? Shell is offering a big premium to BG shareholders, but could it engage in a bidding war? And can Shell be sure that its shareholders will take kindly to an expensive move that is so dilutive, requiring asset sales and, to counter the effect of issuing equity to pay for the deal, a $25bn share buyback?

Shell said today that it expects regulatory scrutiny in Australia, Brazil, China and the EU, but it hasn’t spotted any major problems and expects clearance early next year. That said, it acknowledges that deals of this magnitude are rare, so there aren’t many precedents. And Swiss bank UBS said competition issues might be raised, noting that Shell’s $4.1bn acquisition of Repsol’s LNG portfolio outside of North America got a going over. The combined entity will not be a dominant player in European natural gas. Brazil is unlikely to have worries about the transfer of ownership stakes, as operatorships in sub-salt oil fields are not involved, although BG is the operator of 10 deepwater Barreirinhas basin blocks and is Brazil’s third-largest oil producer. But the deal will cement Shell’s position as a top private-sector LNG player, and that might attract regulatory attention.

The forecast “synergies” of $2.5bn/yr will warm the cockles of shareholders, but leave service suppliers and staff worried. Shell will cut the combined group’s operating and capital expenditure, Shell says in the detailed statement to the stock market, feeding through to lower procurement expenditure. Efficiencies of scale across global marketing and shipping operations are forecast.

As for staff, BG traders will be nervous. So will support staff when they read that “Shell anticipates transitioning BG support function activities (such as finance, HR, etc) on to Shell’s existing systems and legacy BG support function systems will cease to be used”. One particular BG employee may be feeling particularly confused. Helge Lund left Statoil early to take up the role of BG chief executive on 9 February, having been appointed last October. The phone call to the BG chairman from the Shell chief executive came on 15 March, and Lund will be out of a job if or when the acquisition is completed.

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