Queensland Gas, BG to Invest A$8 Billion in Project (Update2)...

Queensland Gas, BG to Invest A$8 Billion in Project (Update2)

Feb. 3 (Bloomberg) -- Queensland Gas Co., an Australian producer of natural gas from coal seams, and BG Group Plc plan to invest about A$8 billion ($7.2 billion) in an export project in northeastern Australia to tap rising demand for the fuel.

The partners plan to build a liquefied natural gas project near Gladstone with a capacity of 3 million to 4 million metric tons a year, with deliveries starting in 2013, Brisbane-based Queensland Gas said today in an e-mailed statement. The investment will include the development of coal seam gas fields, a 380-kilometer (236-mile) pipeline and a production plant.

Demand for LNG is set to more than double to 400 million metric tons a year by 2015 as utilities in north Asia, Europe and the U.S. increase imports for power generation. The investment will give BG, the biggest importer of LNG into the U.S., its first supply of the fuel in the Pacific Basin, the largest import market.

``BG brings a lot of credibility to the project as it has a demonstrable track record of successfully developing LNG projects, in Trinidad and Egypt, as well as proven LNG sales and marketing capability and relationships with key Asian buyers,'' said Frank Harris, co-head of LNG at Edinburgh-based Wood Mackenzie Consultants Ltd. ``BG and QGC still have quite a lot of work to do in terms of exploration and proving up reserves.''

Reading, U.K.-based BG Group, the U.K.'s third-largest gas producer, said Feb. 1 it agreed to pay 299 million pounds ($588 million) for a 20 percent interest in coal seam gas assets owned by Queensland Gas and 9.9 percent of the Australian company. BG, whose market value is 33 times greater than the Australian partner's, will own 70 percent of the LNG plant.

Share Purchase

BG will buy new shares in QGC, paying A$3.07 a share, Queensland Gas said today. Queensland Gas last traded at A$3.42 in Sydney before being halted from trade Feb. 1 before the release of the statement. BG on Feb. 1 rose 40 pence, or 3.6 percent, to 1,140 pence in London after the release of a separate statement through the Regulatory News Service.

``This is going to help QGC commercialize an enormous amount of gas,'' said Mark Greenwood, an energy analyst at JPMorgan Chase & Co. in Sydney. ``They have found probably one of the best partners that could be found.''

The project is the fourth to be proposed for the Queensland coast based on gas from coal seams. There are currently no LNG export projects fueled by coal seam gas. The rival projects are led by Santos Ltd., Arrow Energy Ltd. and Liquefied Natural Gas Ltd. It's likely that all the projects will ``eventually migrate to one,'' Queensland Gas Managing Director Richard Cottee said today on a conference call with reporters and analysts.

Santos Project

BG envisions building further units at the LNG project, which will also process gas supplied by other companies, David Maxwell, vice president and general manager of LNG business development for BG in Asia, said on the conference call.

The deal will increase Queensland Gas's valuation and the shares should benefit, JPMorgan's Greenwood said. For Santos, who has no partner for its proposed LNG project in Queensland, there are advantages and disadvantages, he said.

``I think Santos would have liked to partner with BG, and this could still be the case with a second train, but Santos may not get the terms it was after,'' Greenwood said. ``On the positive side, the momentum behind East Coast LNG is now undeniable, and domestic gas prices will probably rise.''

Santos's plans for its project remain unchanged, said Matthew Doman, a spokesman at Adelaide-based Santos, Australia's third-biggest oil and gas producer. ``This proposal confirms others share our enthusiasm for Queensland coal seam gas to supply the global LNG market,'' he said. Santos last year had a bid to buy Queensland Gas blocked by a regulator. Queensland Gas subsequently formed an alliance with AGL Energy Ltd., which bought a 27.5 percent stake to become its biggest shareholder.

Doubling Prices

LNG from the project will fetch twice as much as gas sold into the Queensland market so the transaction doubles the value of Queensland Gas reserves, Cottee said. The partners expect to approve the project by the second quarter of 2010, he said.

In the project's first year of operation, Queensland Gas's earnings before interest, tax, depreciation and amortization may exceed A$800 million, Cottee said. The Australian company's share of revenue from the 20-year project may be about A$25 billion, he said.

BG last year dropped an alliance with Oil Search Ltd. to study an LNG project in Papua New Guinea. The company is seeking further investments in gas supply in Asia, Maxwell said.

Share of Project

The partners will each spend about half of the estimated A$8 billion investment. Queensland Gas will own 80 percent of the gas exploration and production part of the project, with BG owning the rest. They will have equal stakes in the pipeline, while BG will own the majority of the LNG plant.

BG will purchase all of the LNG from the project and will integrate it into its global gas sales portfolio, Maxwell said.

BG's alliance with Queensland Gas is worth about A$870 million, Queensland Gas said. The U.K. company is paying A$250 million to buy the stake in the company, A$415 million for the interest in Queensland Gas's coal seam gas acreage and will pay A$207 million for a further 10 percent share of the acreage once the LNG project is approved or once Queensland Gas firms up 7,000 petajoules (6.6 trillion cubic feet) of reserves.

Queensland Gas and BG also agreed to evaluate coal seam gas investment opportunities in India.