Cash-rich BGbids £6.1bn for Australian gas producer Origin

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The Independent Online

Emboldened by record amounts of cash pouring into its coffers, BG Group, the international gas explorer, launched an unsolicited £6.1bn offer yesterday for Origin Energy, Australia's second largest energy retailer.

Aside from a courtesy call just a few hours before it went public with its all-cash offer, BG did not bother trying to engage with its prey. Amid the frothy environment of the oil and gas sector, such a swashbuckling move is not altogether surprising. These are heady times. A day after BP and Shell published soaring profits, BG revealed yesterday that its first-quarter profit had leapt to £767m, up 78 per cent on the same period the year before. Its cash pile swelled to £2.2bn, aided by the unprecedented level of the oil price, flirting as it has this week with the $120 per barrel threshold.

BG's shares fell, however, on fears that its all-cash offer, at a 40 per cent premium to Origin's share price the previous day, was over the odds. Frank Chapman, the chief executive, said the hefty price was not based on an assumption that oil would continue at its current level. He said: "We screen all of our ventures across a very wide range of prices. It would be folly in our view to base it on the assumption that the price of today or stronger will continue."

BG's bold move in Australia is very much about LNG, or liquefied natural gas. Super-chilled to the point that it takes liquid form, it is then pumped into massive tankers destined for the port of the highest bidder. Because it makes gas truly mobile, LNG fundamentally changes the economics of how gas can be marketed and sold. Rather than simply pumping it through a pipeline to the nearest customer, BG can cast about for the customer with the deepest pockets – recently, more often than not in Asia. The results have been very good: BG's LNG operating profits more than tripled to £395m in the first quarter from £121m the same period the year before. Of its 58 shipments of LNG during the last quarter, 52 were diverted from their original destination after higher bidders surfaced.

As older fields like the North Sea run dry, demand for LNG will grow. Mr Chapman said yesterday that the market for LNG could grow to 500m to 600m tonnes delivered annually by 2020, nearly four times the 171m tonnes that were delivered around the world last year. "A number of markets around the world that have been relatively self-sufficient are now becoming more dependent on imports, like the US and the UK," said Frank Harris, head of global LNG consulting at Wood Mackenzie, the research firm.

Later this year two new LNG terminals are set to open in Milford Haven on the Welsh coast that will be capable of handling roughly a quarter of UK gas needs: Dragon LNG, 50 per cent owned by BG, and South Hook, a neighbouring, much larger site owned by ExxonMobil, Qatar Petroleum and Total.

Gaining a foothold in Australia is a crucial piece, Mr Harris said, of being able to take a greater share of the burgeoning Asian market, where the need for gas to supply rapidly growing populations and industrialising economies is most acute. "BG has always been noticeably light in the Pacific basin. In that environment the best place to have a supply position is in Australia." Hence the interest in Origin.

The company has the largest reserves of so-called coal seam gas, which can be found along coal seams and removed by extracting water, which keeps the gas trapped under great pressure. The trick is converting it into LNG, which has yet to be proven on an industrial scale. If BG does manage to bag Origin, it would make it the largest single player in this emerging sector after the joint venture it signed in February with Queensland Gas Company in Australia to develop that company's coal-seam gas assets.

It is unclear whether Origin will be a willing seller. Last year the company rejected a merger proposal from AGL Energy that would have valued it at just more than A$1bn over what BG has offered. BG's offer has the benefit of being all-cash, though Origin said yesterday that it had "not yet considered the proposal" and told shareholders to take no action. Speculation was rife yesterday as well that a rival bidder from India or Asia could launch a counterbid.