Friday 7 November 2008

BG still angling for a deal in Queensland

Age
Saturday 25/10/2008 Page: 4

WEEKS after abandoning a $13.8 billion hostile bid for Origin Energy, Britain's BG Group has returned to Australia to claim a consolation prize: its joint-venture partner, Queensland Gas. QGC and its largest shareholder, AGL Energy, entered simultaneous trading halts yesterday morning. BusinessDay believes BG Group has approached the pair about a friendly, $3 billion plus bid for QGC. A deal is expected to be announced to the market as early as Monday, but the terms were still being negotiated yesterday.

QGC shares last traded at $3.20, down from a peak of $6.39 in May. The highest broker price target on the stock is $6.40. The deal would involve AGL agreeing to sell its 25% stake in QGC to BG Group. QGC and BG Group are partners in a proposed $8 billion liquefied natural gas project at Gladstone. That deal would immediately boost BG Group's stake in QGC from 10% to 35% and serve as a strong platform from which to launch its friendly takeover. In return, AGL would be granted the right to coal seam gas resources, possibly through a direct equity ownership in permits.

AGL has been considering options for its valuable stake in QGC for months. In August, AGL's managing director, Michael Fraser, said the holding could be leveraged in return for access to more direct control over gas resources. "In the longer term, one of our aspirations is to have our foot on our own equity gas production at the asset level, rather than through a company," Mr Fraser said.

AGL at present sells more gas through its retail business than it has in reserve, forcing it to buy additional gas from other suppliers. Carbon trading is expected to raise the value of gas on domestic markets, as gas-fired power plants emit up to 70% less carbon than do brown coalfired plants. But increased demand for gas around the world is increasing the value of controlling gas assets directly.

The rush of projects to convert Queensland's coal seam gas reserves into exportable LNG has ratcheted up the benchmark value of gas reserves. Santos has signed an LNG alliance with Malaysia's Petronas, while Origin Energy thwarted BG Group's hostile bid by agreeing to a partnership with US oil giant ConocoPhillips. Both of those deals attracted record prices of $1.65 a gigajoule for the possible reserves to be used in the first two trains of the LNG projects.

QGC, which has extensive coal seam gas acreage in Queensland, has recently moved to extend its holdings through takeovers of Sunshine Gas and Roma Petroleum. It cited the need to bulk up and become an "Australian champion" in the sector. In the past, QGC managing director Richard Cottee had striven to maintain his company's independence. Shares in rival coal seam gas producer Arrow Energy, which has an alliance with Royal Dutch Shell, rose 24(, or 12%, to $2.23 on the news yesterday. Santos shares closed 67g, or 6%, higher at $11.56.

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