The boards of both companies have recommended their respective shareholders to endorse the acquisition.
Shell says the combination would accelerate its growth in global LNG and deepwater E&P, particularly in Australia and Brazil.
It would add around 25% to Shell’s proven oil and gas reserves and 20% to its production, each on a 2014 basis.
Shell CEO Ben van Beurden said: “BG and Shell are a great fit. This transaction fits with our strategy and our read on the industry landscape around us. This transaction will be a springboard for a faster rate of portfolio change, particularly in exploration and other long-term plays.”
BG CEO Helge Lund, who only joined recently from Statoil, said: “The offer from Shell … has strong strategic logic. BG’s deepwater positions and strengths in exploration, liquefaction, and LNG shipping and marketing will combine well with Shell’s scale, development expertise and financial strength.”
Christian Stadler of Warwick Business School, who has researched and worked with Shell over the past 15 years, commented: “Shell missed out on the late 1990s mega-merger wave due to their complex shareholding structure. The company was the product of an unconsumed merger, with 60% being Dutch and 40% British. Mobil for example would have been a perfect fit but ended up in the arms of Exxon because of this. This time round Shell has no such issue, being a normal UK plc.
“Just as in the late 1990s the oil price has plummeted, though then it reached $10 a barrel. Now it is at around $50 and with cost pressures acquisitions are an obvious way to maintain growth, there has been some M&A activity in the oil service sector already. For Shell an acquisition to replace reserves makes sense as attempts to join the US shale boom did not deliver much and exploration budgets are being cut. If Shell takes over BG it could be the beginning of a new wave of mega-mergers in the sector.
“BG would fit well with Shell’s portfolio. Shell has a very good track record in offshore oil and gas fields, and BG will help them solidify this area. Also its replacement ratio – that is the amount of oil fields Shell has lined up to replace the oil it is producing – has not been very good. Acquiring BG will help it do this and although Shell is one of the most globalized companies around it will help it expand into East Africa and increase its Brazil operations.”
Stadler added: “Quite a few oil companies are under cost pressure with no sense of the oil price recovering. Companies had got used to $100 a barrel, and many need $40 to $60 to break even so we could see more of these deals.”