ConocoPhillips Joins Origin in $8 Billion Gas Venture

By Angela Macdonald-Smith

Sept. 8 (Bloomberg) -- ConocoPhillips, the second-biggest U.S. oil refiner, agreed to pay as much as $8 billion to join Origin Energy Ltd. in a natural gas venture in Queensland, potentially trumping a hostile takeover bid from BG Group Plc.

ConocoPhillips will initially contribute $5 billion to take a 50 percent stake in the venture, which will convert coal-seam gas into liquefied natural gas for export to Asia, Houston-based ConocoPhillips said in a statement distributed on Business Wire. Origin, Australia's biggest producer of gas from coal seams, surged to a record in Sydney trading.

LNG demand is set to increase by 10 percent a year through 2015, more than five times projected gains in crude oil, as power producers switch to cleaner fuels, according to Citigroup Inc. Sydney-based Origin last month short-listed bidders for a coal-seam gas venture, saying this would provide more value for shareholders than BG Group's takeover offer.

``This is a massive deal and the sum that ConocoPhillips is prepared to pay really puts a firm valuation under Origin,'' said Gavin Wendt, a senior resources analyst at Fat Prophets Funds Management in Sydney. ``It makes it impossible now for BG with its current offer.''

Origin rose as much as A$4.34, or 28 percent, to A$19.99. The shares were at A$17.50 at 10:27 a.m. local time. Credit Suisse Group is advising ConocoPhillips on the transaction.

`Decade of Growth'

The venture with ConocoPhillips ``will transform Origin,'' Managing Director Grant King said in a separate statement sent to the exchange. ``We will have the financial strength to fund a decade of growth.''

Origin reiterated its recommendation that shareholders reject BG's offer. An independent expert valued Origin at between A$28.55 and A$30.71 a share, compared with BG's A$15.37 a share bid, it said. Grant Samuel & Associates Pty's value range for Origin's coal-seam gas unit alone is A$18.70 to A$19.49 a share, assuming completion of the ConocoPhillips transaction.

Origin plans to start buying back as much as A$1.275 billion of shares once the transaction is completed. It will also pay an immediate extra dividend to shareholders of 25 cents a share, doubling the 2008 distribution.

The companies plan initially to build two LNG production units, each with a capacity of 3.5 million metric tons a year, with deliveries scheduled to start by 2014. Origin will operate the coal-seam gas production part of the venture, while ConocoPhillips, which already operates an LNG plant in northern Australia, will operate the LNG output.

`Australian LNG Hub'

``With this investment, ConocoPhillips has gained access to the leading coal-bed methane resource in Australia,'' Jim Mulva, chief executive officer of ConocoPhillips, said in the statement. ``The company has enhanced its LNG position with the creation of an additional Australian LNG hub serving Asia-Pacific markets.''

ConocoPhillips will own 50 percent of Origin's gross resource of 42 trillion cubic feet of coal seam gas.

Coal-seam gas, mostly comprising methane, bonds as a thin film on the surface of coal and is released when pressure is reduced, usually after water is removed.

LNG is natural gas that has been chilled to liquid form, reducing it to one-six-hundredth of its original volume at minus 161 degrees Celsius (minus 259 Fahrenheit), for transportation by ship to destinations not connected by pipeline. On arrival, it's turned back into gas for distribution to power plants, factories and households.

To contact the reporter on this story: Angela Macdonald-Smith in Sydney at amacdonaldsm@bloomberg.net