There's another player to consider: AGL.AGL has a 50% share in...

There's another player to consider: AGL.

AGL has a 50% share in the Moranbah CSG field in QLD, with Arrow owning 35% and Shell 15%. If Shell takes over Arrow it will become the operator of the field and would divert it to LNG production, which AGL has previously said it is not interested in. AGL would therefore be motivated to sell its share in the field and Shell would be motivated to buy, since even with swallowing up Arrow it would not have enough reserves for its ambitious LNG plans. If Shell pays for the reserves at the 3P valuation in the current takeover offer that could net AGL up to $1.3 billion.

How is this relevant to ESG? AGL does not have enough gas for its projects. It needs up to another 1000 PJ 2P, and if it sells Moranbah it will lose 426 PJ. AGL has also said recently that it is not interested in exploring for gas as there are enough reserves already - with the implication that it might obtain the requisite reserves through acquisition. And unlike the majors interested in LNG, AGL does not see a NSW location as a disadvantage. In fact, its biggest market is in NSW, and it is proposing building 1GW of gas-fired power generation in NSW.

So the sequence of events is: Shell buys Arrow, then Shell buys AGL's share of Moranbah, and a cashed-up AGL goes looking for gas in NSW: ESG and/or MEL. For ESG, there might be a bidding war with Santos. Origin might join in the bidding as well, not happy to see its main rival take such a dominant position in NSW. It could be very interesting times ahead!