BHP BILLITON, the world's largest miner, is drawing up plans for a $46 billion takeover of Woodside Petroleum, the Australian oil and gas producer.
It is understood the FTSE 100 group is holding detailed talks with Royal Dutch Shell, Woodside's biggest shareholder. Shell would give BHP its Woodside shares, and in return receive some of the Australian company's best assets, including the giant Sunrise gas field.
Once BHP has agreed the deal with Shell, it would launch a full takeover offer for Woodside shares, which are listed in Sydney. UBS is advising Shell on its options.
A move on Woodside would mark a significant strategic switch for BHP, which has a cash pile of $15 billion thanks to a commodities boom that has taken the price of iron ore, copper and oil to record levels. While it already has oil and gas assets, they are small compared with its mining operations.
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It would also represent a bold return to the deal-making fray by the group, led by chief executive Marius Kloppers and chairman Jac Nasser. It has attempted three big takeovers in recent years, and failed each time. The most recent came last year when Canadian regulators blocked a $37 billion bid for Potash Corporation of Saskatchewan on the grounds that it was against the national interest.
Woodside, which was founded in 1954, is Australia's biggest oil and gas producer, with a stock market value of $37.1 billion Its star assets are three big liquefied natural gas (LNG) projects, which involve extracting gas, super-chilling it to liquid form and putting it on tankers for export.
It has fought off a foreign takeover attempt before. Shell tried to buy it in 2000 but was rejected by regulators that police overseas investment in Australia.
Sources close to the situation said the talks have intensified in recent weeks but significant obstacles remain and the deal could fall apart.
BHP's board are intent on securing political clearance in Australia - as far as they can - before making a move. While BHP is locally regarded as an Australian firm, its shares are listed in Sydney and London - meaning it would probably have to get clearance from the foreign investment regulator.
Senior sources say BHP is also concerned about paying too high a price to secure the backing of Woodside's management. Woodside's share price has jumped in the past 10 days fuelled by speculation that BHP is circling. Analysts believe it may now be too expensive for BHP.
Investors will be wary of BHP launching another big deal that could be scuttled by regulators - but at the same time are eager for it to find a way to invest its cash mountain.
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