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    Brits claim Queensland Gas

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    * Jamie Freed and Clancy Yeates
    * October 25, 2008

    WEEKS after abandoning a $13.8 billion hostile bid for Origin Energy, Britain's BG Group has returned to Australia to claim a consolation prize: its joint-venture partner, Queensland Gas Company.

    QGC and its largest shareholder, AGL Energy, entered simultaneous trading halts yesterday morning. The Herald understands BG has approached the pair about a friendly, $3 billion-plus bid for QGC.

    A deal is expected to be announced to the market as early as Monday, but the terms were still being negotiated yesterday.

    QGC shares last traded at $3.20, down from a peak of $6.39 in May. The highest broker price target on the stock is $6.40.

    The deal would involve AGL agreeing to sell its 25 per cent stake in QGC to BG. QGC and BG are partners in a proposed $8 billion liquefied natural gas project at Gladstone.

    That would immediately increase BG's stake in QGC from 10 per cent to 35 per cent and serve as a strong platform from which to launch its friendly takeover.

    In return AGL would be granted the right to coal-seam gas resources - possibly through a direct equity ownership in permits.

    AGL has been considering options for its valuable stake in QGC for months.

    In August AGL's managing director, Michael Fraser, told the Herald that the holding could be leveraged in return for access to more direct control over gas resources.

    "In the longer term one of our aspirations is to have our foot on our own equity gas production at the asset level, rather than through a company," he said.

    AGL sells more gas through its retail business than it has in reserves, forcing it to buy gas from other suppliers. Carbon trading is expected to raise the value of gas on domestic markets, as gas-fired power plants emit up to 70 per cent less carbon than brown coal.

    But greater global demand for gas is increasing the value of direct asset control.

    The rush of projects to convert Queensland's coal-seam gas reserves into exportable LNG has ratcheted up the value of gas reserves. Santos has signed an LNG alliance with Malaysia's Petronas, and Origin thwarted BG's hostile bid by agreeing to a partnership with the US oil giant ConocoPhillips.

    Those deals attracted record prices of $1.65 a gigajoule for the possible reserves to be used in the first two stages of the LNG projects.

    QGC, which has coal-seam gas acreage in Queensland, recently moved to extend its holdings through takeovers of Sunshine Gas and Roma Petroleum. It cited the need to bulk up and become an "Australian champion" in the sector. In the past QGC's managing director, Richard Cottee, had strived to maintain his company's independence.

    Shares in the rival coal-seam gas producer Arrow Energy rose 24c, or 12 per cent, to $2.23 on the news yesterday. Santos shares closed 67c, or 6 per cent, higher at $11.56.
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