Mergers and Acquisitions in Australia’s oil and natural gas sector fell from AUD 9 billion in 2014 to AUD 8 billion in 2015 and just over AUD 3 billion in 2016. But lately there has been an upsurge of M&A particularly in regard to shale gas, as Chevron and other giants have begun acquiring extraction rights from small and medium-sized local companies in huge areas of central Australia. Fracking is enjoying a boom here. Unlike in the United States, where it is widely used, in Australia most takes place in desert lands thousands of kilometers away from human settlements and therefore raising little concern from environmentalists.
The race for the Cooper Basin
Australia is the new frontier of shale gas production, and the multinationals are moving in to exploit it. Their attention is particularly focused on the Cooper Basin in central Australia, where Chevron has invested AUD 350 million in a partnership with local company Beach Energy. The Hong Kong-based Cheung Kong Group outbid APA Group to acquire gas distributor Envestra for AUD 2 billion, while Britain’s BG Group has just signed a contract to buy 10 percent of recently established Drillsearch Energy, which owns extraction rights to part of the Cooper Basin. BG Group’s highest-profile investment of AUD 20 billion involves the construction of a gas export plant on Curtis Island off the coast of Queensland, which will earn it major contracts to supply methane gas to Asian markets. Two other Australian companies, Origin Energy and Santos, have built liquefaction and export plants on the island, which is particularly suitable for mooring LNG tankers. The installations will help to meet growing demand from the industrialized nations of Asia, and that demand is fuelling M&A activity in relation to companies owning extraction rights in the Cooper Basin.
These acquisitions are so numerous that they are difficult to keep track
of. Nearly all small and medium-sized local companies have been acquired by or merged with multinationals. The sole exception is Real Energy Corporation, which controls a vast portion of the basin and has only AUD 33.5 million in share capital, though it has enough cash to begin fracking for shale gas and oil in an area that is hugely attractive to the energy giants. The company has resisted takeover attempts and seems determined to continue operating on its own account—all the more so under the chairmanship of Norm Zillman who is considered something of a guru of the gas industry. He was the founder and managing director of Queensland Gas Company, starting out with just AUD 20 million in share capital and selling it for a colossal AUD 5.6 billion. So great is Zillman’s passion for the project that he came out of retirement to take up the position of chairman of the board. Real Energy Corporation has just AUD 13 million to cover its extraction costs over the next few months, and whether this is enough remains to be seen.
Keeping the domestic market supplied
The future looks very bright for the Australian gas industry, both upstream and downstream. Ironically, though, it is also at the centre of an industrial and political controversy, as there is a shortage of gas for domestic consumption which is verging on emergency levels. The government has repeatedly threatened the three big exporters, Origin Energy, Santos and Royal Dutch Shell, with export restrictions unless they direct part of their output to the Australian market. The three companies initially dug in their heels, claiming that such limits would bring about a “sovereign risk,” but this is very unlikely given Australia’s geopolitical advantage over rival gas suppliers: it is geographically closer to some of the world’s biggest LNG importers, and transporting gas by sea is very expensive. Qatar, Australia’s leading competitor, is locked in a dispute with its neighbors, and supply negotiations between Russia and China have foundered. Also, Australia is about to sign a free trade agreement with Japan, China and South Korea, all big importers of gas, and the government is unlikely to make any decisions that could put this at risk. Asia is the world’s biggest market for LNG, importing 245 billion cubic meters a year, of which only 40 billion arrives by pipeline via Central Asia. From 2015 to 2016, Australia exported 37 million tons worth AUD 16.5 billion, and around 90 percent of this went to Japan, China and South Korea. Australia’s gas shortage is likely to bring a substantial increase in domestic LNG prices, which will inevitably be passed on to consumers.
Elenoire Laudieri di Biase is a Sinologist, Foreign Affairs Writer, Chief Analyst at Nato defense college Foundation, Editor in Chief at Segmento Magazine, Australia.