article from pnn - fyi

BG, Arrow need certainty for train timetables

Steve Rotherham
Wednesday, 18 February 2009

BG GROUP and Arrow Energy probably have enough coal seam gas to underpin multiple production trains in their planned Queensland LNG projects, but probably isn’t good enough.



Speaking off the record, an analyst told PNN that the bidding war for Pure Energy showed BG and Arrow were seeking gas supplies at very high levels of confidence.

This confidence was needed to underpin the rollout of multiple production trains and to win over prospective financiers in a risk-averse economic environment.

“At the moment, based on its stated reserves, BG has enough 2P [proven and probable] gas to supply one train for 10 years, and enough 3P [proven, probable and possible] for 15 years of gas on two trains,” the analyst said.

“Add in the Pure reserves and it will have enough 3P gas for 21 years on two trains.”

He conceded that even this would not be enough to win financial backing for a two-train project – BG would also have to rapidly convert 3P reserves to 2P status.

“But upgrading 3P reserves to 2P is highly achievable for experienced companies in the CSG sector,” he said.

“Industry insiders are saying that BG has already done a lot of good work in the old QGC and Sunshine Gas acreage since it took over those companies.”

In a briefing document released yesterday, Arrow said it has a target of adding at least 1 trillion cubic feet (about 1000 petajoules) of gross 2P reserves every year going forward.

“This means by 2012 we would have enough 2P reserves to supply a potential 3 million tonne per annum LNG train and then add sufficient reserves for new 3 million tonne per annum trains every four years thereafter,” Arrow managing director Nick Davies said.

“We are also looking to significantly increase the rate of reserve certification as we expand our exploration programs and our knowledge of the resource base.”

Those are impressive figures and targets, but if Arrow’s LNG partner, Royal Dutch Shell, wants to roll out a multi-train LNG project at Gladstone, Queensland in the shortest possible timeframe, it will need to be presenting potential backers with much higher 2P reserves figures in the next 12 months.

BG has much larger certified 2P reserves – 2700 petajoules compared to Arrow’s 1180PJ. This means Shell needs the gas more than BG does.

Pure has 2P reserves of 394PJ at its Cameron field in ATP 852P, which is strategically located between the Spring Gully and Scotia fields, right where some of the main pipelines taking CSG to Gladstone will pass through.

ATP 852P is the big prize. But Pure also holds two Surat Basin permit applications of great interest.

The first, ATP 965P(A), is southwest of Arrow’s Tipton West project. The second, ATP 889P(A), lies close to the Lacerta field, held by BG; indeed, Pure believes ATP 889P(A) is an extension of Lacerta.

BG yesterday made a sweetened second bid for Pure of $8 cash a share – valuing Pure at just under $1 billion.

This trumps Arrow’s second bid, which offers $3 and 1.57 Arrow shares for every Pure share.

BG has a larger war chest than Arrow and by increasing its offer for Pure it has increased speculation that Shell could make a takeover offer for Arrow.

By bidding for Arrow at a premium, Shell would also drive up the implicit value of Arrow’s bid for Pure.

Pure shares rose 11.8% yesterday to close at $8.36, passing BG’s $8 offer price, indicating some investors expect an even higher offer to emerge.

Arrow shares added 3% to close at $2.73. Given the generally flat market, this suggests speculation it could become a target for Shell.

BG said it has already received Foreign Investment Review Board approval for its proposed takeover of Pure.

Its offer is now unconditional, removing a previous 50% acceptance cap.

The market is now waiting to see what Arrow and Shell will do.

Shell has left its run late. The company made its deal with Arrow in June (taking 30% in Arrow’s CSG acreage), and could have easily made a bid for Sunshine Gas soon after that, snaffling up that company – then by far the largest of the CSG juniors with 469PJ in 2P reserves – while BG was distracted by its takeover bid for Origin Energy.

Instead, Queensland Gas Company was able to make an $895 million bid for Sunshine in August and wrap up the deal in November, shortly before it was in turn taken over by BG.