* Chinese regulators ask Shell to cut long-term LNG prices
* Price erosion could weaken merger's near-term benefits
* Deal remains on track for early 2016 completion, Shellsays
By Ron Bousso, Dmitry Zhdannikov and Chen Aizhu
LONDON/BEIJING, Nov 19 (Reuters) - Chinese regulatorsvetting Royal Dutch Shell's proposed merger with BGGroup are pressing the Anglo-Dutch company to sweetenlong-term gas supply contracts in a move that could cast newdoubt over the near-term benefits of the $70 billion tie-up.
For China, the opportunity to re-negotiate existingliquefied natural gas (LNG) supply contracts with Shell, whichcombined with BG would supply around 30 percent of its importsby 2017, comes at an ideal time because the world's top energyconsumer faces a large surfeit over the next five years.
For Shell, any revision of the contracts with China coulddilute the near-term financial benefits of a merger that hasalready raised concern among some investors and analysts becauseof stubbornly low oil prices.
Shell declared it wanted to become the world's top trader ofLNG when it agreed a takeover of BG in April.
It expects global demand for LNG to grow by nearly 5 percentper year by 2030. Power plants, industries and vehicles areshifting to the less polluting gas, which once extracted fromthe ground is cooled and liquified, loaded onto ships beforebeing turned back into gas at its destination.
The proposed Shell-BG tie-up has already won mandatoryapprovals from Brazil and the European Union. It securedclearance on Thursday from one of two Australian regulators butstill requires the green light from China.
Senior Shell officials, who have held closed doordiscussions in recent months, had expected China's anti-trustauthorities to put forward some demands before approving thedeal just as they did ahead of Glencore's $29 billionmerger with Xstrata in 2013.
On that occasion, the Swiss-based mining and trading giantagreed to sell its Las Bambas copper mine in Peru to China's MMGLtd for $7 billion in exchange for China's approval.
As the Chinese regulatory approval process entered its thirdand final 60-day phase earlier this month, Beijing broached withShell a request to review prices in LNG contracts worth tens ofbillions of dollars annually with its energy champions ChinaNational Petroleum Corporation (CNPC), China National OffshoreOil Corporation (CNOOC) and Sinopec, industry sources close tothe talks told Reuters.
Negotiators from China's ministry of commerce (MOFCOM) arealso seeking to lower import volumes by extending the term ofthe existing deals with Shell as well as other suppliers inorder to thin out deliveries given low demand, according toseveral sources.
"It's a reasonable request given the premiums Chinese andother Asian buyers are paying for long-term LNG versus those forEurope and America. The market is oversupplied, and thissituation may well last through the next five to 10 years," saida gas official with one Chinese state energy firm.
LEVERAGE
A Shell spokesman would not comment on the re-opening of theLNG contracts but said the merger was still on track forcompletion in early 2016.
"The regulatory review process in China continues toprogress well and is on track. We are confident that, followingthe usual thorough and professional review, the deal willreceive MOFCOM's approval," he said.
MOFCOM did not immediately respond to a request for comment.
The approval of the Shell-BG deal is a "wonderful piece ofleverage" for Chinese energy firms, an industry source said.
Importers are scraping by on slim margins due to lowregulated domestic prices and have also had to deal with anunexpected dip in demand. While spot LNG prices are currently at$7-$8 per million British thermal unit (mmBtu), some of China'scontracted volumes are pegged at around $8-$9 per mmBtu.
China's long-term LNG supply contracts are typically peggedto a basket of Japanese crude oil prices with a built-in timelag reflecting prices before last year's sharp declines.
As a result, many of the supply contracts, such as thosefrom the giant Gorgon project in Australia where Shell is apartner, are fixed at higher quotes than the global spot priceswhich have come off sharply over the past 18 months due to ofrising production.
Some Shell officials fear that a revision of the terms ofthe contracts could create a ripple effect around the world,further eroding gas prices.
The combined Shell-BG group is planned to sell around 15million tonnes of LNG per year by 2018 to China's majorimporters, around one third of China's contracted volumes.
Despite its reluctance, Shell might have to make someconcessions to keep the deal on track.
"Reducing the volumes might be a price Shell would beprepared to pay to gain approval from the Chinese regulator. Itwould be possible to find markets for any volumes not taken byChinese buyers so the impact on revenues would be limited,"according to independent energy consultant Andy Flower.
(Additional reporting by Oleg Vukmanovic in Milan; Editing byKeith Weir)
