Joint deal with Shell gives Beijing a stake in Australian coal-seam gas

• Shell and state-controlled PetroChina in £2.1bn takeover of Australia's Arrow Energy • Anglo-Dutch energy firm plans more deals with Chinese companies

Tim Webb
guardian.co.uk, Monday 22 March 2010 18.13 GMT
Shell has strengthened its hold on Australia's bulging gas reserves after Arrow Energy agreed to a joint $3.2bn (£2.1bn) takeover by the Anglo-Dutch oil company and PetroChina, which is majority-owned by the Chinese government.
The deal, which has to be approved by the coal-seam gas producer's shareholders and Australian regulators, will also reinforce Shell's relations with Beijing.
At Shell's strategy update last week, finance director Simon Henry told the Guardian the company hoped to team up with Chinese companies – who are mostly state-controlled – to buy more foreign energy firms. "We are politically neutral," Henry said. "We can enable a deal they could not do on their own."
The Chinese state-controlled aluminium firm, Chinalco, caused controversy in Australia last year, when it tried to double its stake in the miner Rio Tinto, a deal that was eventually abandoned. Both sides hope Shell's presence will see this one go through.
The deal would also see a Chinese company acquire for the first time a stake in Australia's vast reserves of coal-seam gas, where trapped gas is extracted from underground coal seams.
Shell, which already owns 30% of Arrow, and Petrochina had to up their offer by 6% to secure today's recommendation from the board.
Arrow holds the largest coal-seam gas acreage in Australia, at 65,000 sq km. It supplies a tenth of Queensland's domestic gas needs but production will increase significantly as its reserves are developed by its new owners. Shell and PetroChina will each take 50% of the surplus gas produced, which they will export as liquefied natural gas (LNG). PetroChina will sell its share into China, and Shell has indicated that it will do the same.
Shell already has plans to build an LNG plant on Curtis Island, in Queensland and the first shipment could be made in 2015.
Shell has identified Australia as key to maintaining future production growth. The company has a 25% stake in the $42bn Gorgon LNG project and a stake worth $11.4bn in Woodside Petroleum.
Malcolm Brinded, Shell's executive director of upstream international, said: "The new joint venture will be an important growth asset for Shell, and help meet growing demand for cleaner energy in Australia and international markets."
The deal is likely to face close scrutiny from Australia's Foreign Investment Review Board (FIRB), which has said it wants to restrict foreign ownership of the country's leading resource companies to a maximum of 15% and could attach stringent conditions. But analysts said the deal is unlikely to face as much hostility as the Rio Tinto and Chinalco one. This is because of Shell's presence and also because the pricing of the LNG produced by Arrow will be more transparent than the arrangements put forward for Rio to sell its iron ore to China under the Chinalco deal.
The Australian government is also keen to foster closer ties with China, the largest customer for its mineral resources. In a sign of Australia's softening stance, in December the FIRB approved the biggest takeover by a Chinese company to date, the $3.5bn acquisition of Felix Resources by Yanzhou Coal.
Under the proposed deal with Arrow, the Australian company would retain its international assets, which would be transferred into a new company, Dart Energy.
Field studies"Unconventional" oil and gas reserves are increasingly important for firms such as Shell. As conventional fields in the North Sea and elsewhere run out, firms must use sophisticated new technologies to find other reserves. Coal-seam gas is one example, found naturally beneath coal deposits, which are often too low in quality or too deep to be mined conventionally. Oil sands, from which tar is extracted, is another, more controversial, example. But companies tend to avoid the term "unconventional" because it describes most new exploration and production.