Arrow Hoses Down Takeover Talk  

The SMH has an update on the coal seam gas industry, particularly rumours that Arrow Energy is in play - Arrow Energy says it is geared up for growth, not takeover. More at The Australian - Shell on the outer in Queensland gas deal.

MUCH like its line of business, the coal seam gas producer Arrow Energy came from relative obscurity last year.

In June the Queensland company signed a $776 million deal with the global giant Shell to supply gas to one of several projects looking to export the fuel to Asia. They plan to supply a plant operated by LNG Ltd, which will then export 1.5 million tonnes of liquefied natural gas a year by 2011-12. This amount is about half of Queensland's yearly gas consumption, and the companies plan to double output after the plant begins production.

To show it is serious, Arrow recently unveiled a $673 million takeover bid for the explorer Pure Energy Resources, in a move which should supply enough gas to meet the LNG target. The project is the smallest of four competing efforts to export coal seam gas from the region, which have attracted about $15 billion in commitments from global oil companies this year.

Considering this, and that Shell normally sets its sights on bigger deals, Arrow seems a possible target for a wave of consolidation in the industry as players look to cut costs. But the chief executive of Arrow's Australian operations, Shaun Scott, denies the company is preparing to put itself up for sale. Instead, he said the wave of deal-making in the sector was likely to dry up this year. "Fundamentally, the transactions that could have happened have now happened," he told the Herald.

After its bid for Pure Energy, Arrow is the only large coal seam gas specialist left in Queensland, and its NSW rivals are several years behind in proving their reserves. Other possible targets, such as Sunshine Gas and Roma Petroleum, were bought by Queensland Gas - which is owned by BG Group of Britain.

Rather than more takeovers, Mr Scott said the next step for the sector was project-level consolidation, as the complex business of building the multibillion-dollar plants began. Companies are already talking to each other informally in an effort to avoid a squabble over resources and labour.

"Logistically, everyone trying to build their own LNG project at the same location and the same time is going to create some challenges," Mr Scott said. "Everyone is trying to make sure that their own project … is as strong as possible, so that when those discussions really do begin in earnest as everyone's expecting, you'll be in the strongest position."

Analysts say the vast resources and technical skill required for building LNG plants will cause Queensland LNG rivals to seek merger opportunities. Another risk is the price of oil, which broadly sets the price of LNG. It was racing towards $US150 a barrel when the flurry of deals were signed in the first half of last year, but is now hovering around $US40. The long-term floor for exporting LNG project is about $US40, so it is fair to assume the companies that put Australian coal seam gas on the world stage will be watching on nervously.

"Yes, we're at the bottom of the cycle, and it's been a particularly nasty one," Mr Scott said. But he is confident oil prices will pick up, and he points out that the futures market is pricing oil at about $US70 a barrel in 2012.