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BG Group and China's CNOOC sign massive 20-year LNG sales deal

|Includes: CNOOC Limited (CEO)

BG Group (LSE: BG) has signed a Liquefied Natural Gas (NYSEMKT:LNG) sales contract with state-owned China National Offshore Oil Corporation (CNOOC), concluding negotiations announced in May 2009, for the supply of 3.6 million tonnes of LNG per annum (mtpa) over a 20-year period. The deal is reported to be worth between US$40-80bn depending on varying oil price assumptions.

"These agreements are a landmark development in the relationship between our two companies, building on what is already a close and productive partnership in deep water exploration, offshore China”, BG chief executive Frank Chapman commented. “CNOOC is a highly accomplished company and we look forward to working together as we bring this new ground-breaking LNG project to fruition".

Under the terms of the contract, CNOOC will be supplied with LNG manufactured at the Queensland Curtis LNG facility, Australia. BG Group may also supply CNOOC from the group's global LNG portfolio.

The agreement is one of the largest LNG contracts in Australia. It is the world's first fully-termed sale and purchase agreement for the supply of LNG from coal seam gas, and marks the first sale of LNG from coal seam gas into China, BG said.

The Queensland Curtis LNG development is supported by BG’s LNG supply agreements for a total of 8.3mtpa, consisting of the 20-year CNOOC deal for 3.6mtpa, a 21-year agreement to supply Chile with 1.7mtpa and a 20-year agreement to supply up to 3mtpa to Singapore.

The facility is being developed by BG's wholly owned Australian subsidiary and subject to government approval, the FTSE100 constituent expects to sanction the project this year. The plant is expected to come on-stream by 2014. The plant will be supplied with coal seam gas from the extensive acreage in the Surat Basin.

Under the terms of parallel agreements between BG Group and CNOOC, the Chinese company is also investing in the development of the facility. CNOOC will acquire a 5% equity interest in the reserves and resources of certain BG tenements in the Walloons Fairway of the Surat Basin in Queensland. BG said the total book value of sold assets is approximately US$270 million.

CNOOC will also take a 10% equity investor in facility’s Train 1,  which is the first of two liquefaction trains to form the first phase of the development. Additionally, the Chinese company will reimburse BG for 10% of costs incurred in respect of Train 1, which is expected to be paid in cash later this year. Furthermore, BG Group and CNOOC have agreed to participate in a consortium to construct two LNG ships in China that will be owned by the consortium.

BG Group and CNOOC have been in partnership in offshore exploration in China since 2006, and in 2008, the two companies agreed to explore further opportunities for strategic cooperation.

Disclosure: no positions