Shell-BG deal may shake up rival Australian LNG plans

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By Sonali Paul

MELBOURNE, April 8 (Reuters) - Tightening gas supplies in eastern Australia and a battle for gas to supply three liquefied natural gas plants will figure largely in watchdogs' review of Royal Dutch Shell (Xetra: R6C1.DE - news) 's $70 billion takeover of BG Group (LSE: BG.L - news) .

The deal may help break a deadlock over coal seam gas owned by Shell (LSE: RDSB.L - news) 's Arrow Energy in Australia, which has been stuck in the ground after it scrapped plans to build an LNG plant in Queensland and entered talks to supply other LNG plants there.

Shell hopes Australia's competition and foreign takeovers watchdogs will take that into account when weighing the potential benefits to the economy and consumers in the eastern states, whose gas costs have soared as supplies have been diverted to LNG exports.

"There's a strong, compelling industrial logic for what now needs to happen in South Queensland. I'm sure that the Australian government and the regulators will pay attention to it as well," Shell CEO Ben van Beurden told reporters on Wednesday.

"So we want to be working with the authorities in Australia to figure out what is right for the enlarged company and also for the Australian government and the Australian consumer. But you're right, there's work to be done in that area."

The deal needs to be approved by the Australian Competition and Consumer Commission and the Foreign Investment Review Board which makes a recommendation to Treasurer Joe Hockey.

Hockey's office declined to give a view on the bid. The competition commission said it was likely to conduct a public review once it receives a submission from Shell.

The deal is expected to complicate life for Australia's Santos Ltd. It is set to start exporting LNG this year from its Gladstone LNG plant, which neighbours BG's Queensland Curtis LNG plant and opened late last year.

Arrow has been in drawn-out talks to sell gas to Santos' Gladstone LNG (GLNG), which would supplement Santos' own coal seam gas to meet its export commitments over the next 20 years.

At the very least, Shell's move on BG is likely to put negotiations on hold. At worst for Santos, the Anglo-Dutch giant is likely to want to put Arrow's gas into BG's LNG plant instead of into GLNG, analysts said.

"It could be a negative for GLNG. The risk for GLNG is that even if there might be an opportunity to buy gas from Arrow, it's unlikely to happen soon," said UBS (NYSEArca: FBGX - news) analyst Nik Burns.

Arrow Energy spokesman said the company had been in talks with the owners of LNG projects, but declined to comment on who it had been talking to or what impact a Shell takeover of BG would have on those talks.

Santos declined to comment on the deal.

While analysts say Santos needs to fill a gas supply gap, it has repeatedly said it has 9,000 petajoules of its own reserves and resources to fill its plant over 20 years.

"Any suggestion that that's not available to us, I think the facts just don't support it at this stage," Santos CEO David Knox said in February.

But at the same time, he said if it were cheaper to line up third party gas supply instead of spending money developing its own gas resources, "then absolutely we'll entertain it".

China's anti-trust authorities will also be interested. CNOOC Ltd (HKSE: 0883.HK - news) has a stake in BG's Queensland Curtis plant and buys its gas; PetroChina (HKSE: 0857-OL.HK - news) is Shell's partner in Arrow Energy; and Sinopec (HKSE: 0386-OL.HK - news) owns a stake in another rival, the Australia Pacific LNG project, led by ConocoPhillips (NYSE: COP - news) and Origin Energy. (Reporting by Sonali Paul; Editing by Ruth Pitchford)