Royal Dutch Shell to Purchase BG Group for $70 Billion
By admin April 10, 2015

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Royal Dutch Shell Oil made an offer to buy the BG Group on April 8, 2015 for USD $70 billion—an amount more than 10 times of BG’s profit in 2014. BG Group is a leading UK oil company with a market value of $60.5 billion as of April 8. It specializes in upstream business (exploration and production activities plus liquefaction operations associated with liquefied natural gas projects) and liquefied natural gas (LNG) business (shipping and marketing).

This M&A deal is partly due to the sharp fall in energy prices. In March 2015, crude oil prices fell to $43.88 a barrel, reaching their lowest level since the 2009 financial crisis. Even though both Shell and BG were adversely affected from the low prices, Shell is still able to make this strategic move because of its bigger size and better capital support.

Shell Oil CEO Ben van Beurden said Brazil and Australia were the two key reasons for buying BG. In Brazil, Shell is interested in Santos Basin, a prolific offshore Brazil oil well. It has the best flow rates in the industry and BG Group has a large share of its production. In Australia, Shell will be able to grow its market share of LNG production. This did not only in Australia, and it is believed that a larger market share of LNG is the main purpose of this deal, as Shell CEO Beurden said LNG “is a very very important component of this”. According to BG’s company website, with their unique LNG model, they have “delivered to 26 of the 27 countries that currently import LNG” and will “be the largest contracted supplier to China, the world’s fastest-growing LNG market” in 2017.

LNG is a natural gas that has been converted to liquid form using super-cooling systems. It makes natural gas a global commodity due to the convenience of transportation for long distances. For example, LNG makes it possible to transport energy resources from Africa to big markets like China and India. With BG Group’s expertise. Shell oil could largely increase its current LNG market share of 16% and exploit the rising demand of natural gas worldwide.

Shell sees a promising future in LNG due to the soaring demand of energy. It has invested $56 billion in the cooling plants, terminals and other LNG infrastructures over the last decade. By purchasing BG Group, Shell will acquire LNG assets in places like Australia, Egypt and Trinidad & Tobago. In addition, Shell will enlarge its market presence in areas such as East Africa, where BG Group has recently made new gas discoveries. With bigger energy reserves and a wider global network, Shell would be able to further utilize the resources efficiently, capturing more LNG opportunities and reaching economics of scale.

Currently, the big investment in LNG seems a wise decision for the company. In 2014, Shell reported $11.3 billion in earnings from LNG, accounting for 75 percent of its total income. It is expected that together with BG Group, the LNG capacity of Shell will increase by 73 percent in the coming three years. However, at the same time, some experts worry about the possible shrinking of LNG demand due to weak economies and the volatility of prices.

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