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Takeover may signal higher gas costs -

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Takeover may signal higher gas costs

Reporter: Simon Santow

ELEANOR HALL: First it was the Chinese eyeing off Australian iron ore, now it's the British trying
to get a piece of the nation's gas reserves.

British Gas Group has launched a $13-billion takeover bid for the electricity and gas retailer,
Origin Energy.

Analysts say the offer appears to be good value for Origin shareholders but the Federal Government
still needs to be satisfied that the takeover would be in the national interest.

And as Simon Santow reports, that may prove difficult because the deal could mean significantly
higher gas prices for Australian consumers.

SIMON SANTOW: If you're an Origin Energy shareholder you can't lose right now.

The market likes the takeover talk, pushing prices up sharply.

Then there's the option of taking up the offer to sell to BG at a 40 per cent premium on what
shares were trading earlier in the week.

Utilities analyst David Leitch from UBS Australia.

DAVID LEITCH: Personally I do believe this is what we are calling a knockout bid. It's a
substantial premium to what I, and I believe many others thought Origin was worth previously.

SIMON SANTOW: And what about the regulatory hurdles?

DAVID LEITCH: Well, there's both the ACCC and the FIRB, whilst we don't discount that risk
entirely, from where I sit, and I'm not a lawyer, I think they're only question marks, rather than
major issues.

SIMON SANTOW: It remains to be seen whether politicians, such as the Federal Treasurer and his
Opposition counterpart, aren't a little more sensitive to the domestic agenda.

In particular, there's rising inflation and pressure on household budgets.

Kevin Rudd's working families are coping with higher petrol costs, rising food prices, and paying
more for essentials such as water and electricity might be a bitter pill to swallow.

Analysts such as David Leitch are certain this sort of acquisition will force up prices, but he
says they were on the rise anyway.

DAVID LEITCH: We are seeing a general trend for energy and gas in particular to be more closely
aligned to the international price for gas.

Historically the price of gas on the east coast of Australia has been under $3.50 a gigajoule,
whereas the international price, if you look in the United States, has been over $USD 7 in recent
years. And LNG prices to the Far East are double that again.

We can look forward to paying more for our energy, both electricity and gas in future years,
probably quite substantially more.

SIMON SANTOW: Jason Mabee is another Utilities analyst, he's at ABN Amro.

He sees the deal as good value for everyone except for ordinary consumers, consumers who are about
to wear the effects of global climate change.

JASON MABEE: In the way I see electricity prices playing out in Australia is that they're going to
be driven by whatever the new entrant cost of generation is, and at the moment, with coal being not
that environmentally friendly, that really gas is being looked at the marginal fuel source.

So therefore, whatever your gas price is, that drives what the electricity prices will be and when
you look historically, we've had an abundance of both cheap gas and coal, so we've had cheap
electricity.

But if that gas price is going to rise to more of an LNG type of net back then obviously
electricity prices have to rise as well.

SIMON SANTOW: And how much do you think the consumers are going to feel that?

JASON MABEE: Well, look, if you are talking about say, a $6 a gigajoule gas price going into a
power station, that's about $65 a megawatt hour, roughly, and the current going rate for a
wholesale price is, let's call it $45 the current long term price, so you're looking at about a 50
per cent impact on wholesale prices - ballpark figures, maybe a quarter closer to retail prices.

And that's just off that issue alone, then of course on top of that you have the carbon
implications as well.

SIMON SANTOW: As to whether BG Group has offered too much for Origin, only time will answer that
question.

But UBS Australia's David Leitch is optimistic there's plenty of room, even at $13-billion, for
profit and growth potential.

DAVID LEITCH: It believes that Origin has a lot more gas than it's so far told the market about,
and because it believes that the price of energy generally, including gas, is going up.

We've seen a tremendous growth in the value ascribed to the coal seam methane resources in
Queensland. I was just looking at some calculations a little while ago, and on 1st of Februrary
2006, Origin bought about half of its coal seam methane business from another company for $70
million and I think its going to be selling part of it, on my numbers, for over $2-billion two
years later.

ELEANOR HALL: That's David Leitch, a utilities analyst at UBS Australia, ending Simon Santow's
report.