By Narottam Medhora and Dmitry Zhdannikov
(Reuters) - Royal Dutch Shell is in advanced talks to buy BG Group in the first oil super-merger in more than a decade, seeking to extend its lead in gas production and close the gap with the world's biggest oil major, U.S. ExxonMobil .
BG, which has a market value of $46 billion, said in a statement on Tuesday it was in advanced discussions regarding a possible offer by Shell, whose market capitalisation is $202 billion. Exxon is worth $360 billion.
A successful deal would give Shell access to BG's multi-billion dollar projects in Brazil, East Africa, Australia, Kazakhstan and Egypt, including some of the world's most ambitious liquefied natural gas (LNG) projects.
The collapse in global oil prices has sparked much speculation about mergers in the industry and BG has often been cited as a potential target.
An agreement would mark the biggest announced deal globally this year. In terms of oil and gas mega mergers, it would be the world's fourth largest since 1996 when BG's net debt of about $12 billion is included, according to Thomson Reuters data.
The talks come as BG, Britain's third-largest energy company by market value, has been plagued by delayed payments in Egypt, written $6 billion off the value of it oil and gas business and seen an 8 percent decline in annual net earnings. It has also cut capital expenditure by as much as 36 percent this year.
BG said Shell must announce a firm intention to make an offer by May 5 or announce that it does not intend to make an offer. "There can be no certainty that any offer will ultimately be made for BG," it said.
BG shares have tumbled nearly 28 percent since mid-June, when the slump in global oil prices started. That compares with a 17.2 percent decline in the FTSE All Share Oil and Gas Index <.FTASX0530> and a 3.3 percent fall for Shell's Amsterdam-listed shares.
Shell, which declined to comment on the talks, has also felt the pain of the plunge in oil prices.
Although profits for the last quarter of 2014 climbed, it missed forecasts by more than 20 percent, with Shell blaming writedowns and foreign exchange losses for making almost no money in oil production, its most powerful unit. It has also announced a three-year $15 billion spending cut.
The halving in crude prices on the back of a shale oil boom in the United States and a decision by Saudi Arabia not to cut production has created an environment similar to the early 2000s when many super-mergers took place.
Back then, oil major BP acquired rival Amoco and Arco, Exxon bought Mobil and Chevron merged with Texaco.
While the talks represent a rare mega-merger opportunity, the UK-based producer has problems which could complicate a deal, bankers familiar with BG's operations have said.
"Brazil is certainly a drag on any transaction," said a London-based banker, referring to an investigation in Brazil into corruption charges involving state champion Petrobras that is delaying oilfield projects. BG has, however, not reported any delays.
Problems in Egypt, where the government has delayed payments to oil and gas firms amid almost three years of instability, forced the company to rush in former Statoil A/S CEO Helge Lund in February, nearly a month ahead of schedule.
The company is also heavily invested in LNG projects, that have assumed high prices. But LNG has fallen more sharply than oil, with Asian spot prices down almost two thirds in the last year.
The industry as a whole has also developed too many projects set to come onstream in the next few years, likely to cause a glut and an price collapse several years down the road, analysts have said.
Discussions were first reported by the Wall Street Journal, which cited sources familiar with the matter. (http://on.wsj.com/1FcKGGY).
In a sign that Lund is beefing up expertise for the talks with Shell, BG poached two officials from Statoil, including Katie Jackson, who was responsible for mergers and acquisitions
($1 = 0.6749 pounds)
(Reporting by Narottam Medhora and Sai Sachin R in Bengaluru, Additional reporting by Greg Roumeliotis and Denny Thomas; Writing by Denny Thomas; Editing by Savio D'Souza, Bernard Orr and Edwina Gibbs)