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Shell Backs Off from East African Gas Deal

Royal Dutch Shell PLC is returning its exploration focus to the West African heartlands after a second attempt to gain a foothold in massive new gas discoveries off Africa's East Coast failed.

Shell Backs Off from East African Gas Deal Shell Backs Off from East African Gas Deal

Royal Dutch Shell PLC is returning its exploration focus to the West African heartlands after a second attempt to gain a foothold in massive new gas discoveries off Africa's East Coast failed.


The Anglo-Dutch energy company has pulled back from talks with Anadarko Petroleum Corp., aimed at buying a share of its gas discoveries off the coast of Mozambique, because the asking price had risen too high. This follows Shell's defeat last year in a bidding war for one of Anadarko's partners in the discoveries, Cove Energy, which was eventually acquired by Thai oil company PTT Exploration & Production PCL.


Instead, Shell plans to deploy a newly refurbished rig to begin drilling for the first time in deep water off the coast of Benin and Gabon, as well as off South Africa's northwestern coast next year. Although the outcome of these efforts is more uncertain than an acquisition, analysts say they may ultimately deliver better value for shareholders.


Shell's move is indicative of a broader trend in the industry. Western oil companies are under increasing pressure to find more oil and gas to replenish declining reserves. Last year Shell had one of the worst records, replacing just 44% of the oil and gas it produced during the period with new resources.


In the past, companies such as Shell have frequently offset shrinking reserves by purchasing smaller companies flush with new discoveries. But that option is fading as interest from state-backed companies from energy-hungry Asian countries, whose priority is to guarantee secure energy supplies rather than shareholder returns, make assets such as the Mozambique gas fields increasingly unaffordable.


"We don't see from our perspective that the price expectations are realistic," in Mozambique, said Shell Chief Financial Officer Simon Henry on the sidelines of the company's annual general meeting in The Hague last week. He declined to give more details about the talks.

Anadarko is looking to sell a stake of up to 10% in Mozambique discoveries estimated to hold as much as 65 trillion cubic feet of gas. In March, a spokesman from Anadarko said there had been "a lot of interest from a lot of players," including major oil companies.


Anadarko didn't respond to requests for comment on Friday.

State-backed Chinese oil companies were the biggest spenders on oil and gas acquisitions in 2012, a trend that is expected to continue this year, according to energy consultancy Wood Mackenzie. In contrast, international oil companies' spending on assets in 2012 was the lowest in eight years, it said.

This shift demonstrates that it is very hard to get value for money, said Wood Mackenzie's vice president of exploration, Andrew Latham. "If the assets are high quality, in an auction situation you'll have to pay full value to acquire them," he said.


Largely shut out of acquisitions, companies such as Shell have instead ramped up their spending on exploration. In the past two years, Shell says it has secured rights to almost three times as much new exploration acreage as it acquired in 2010. This year, the company expects to spend $7 billion searching for oil and gas, a nearly 10% increase from 2012 and almost double the $3.7 billion spent in 2011.


This rise is mirrored across the sector, where exploration spending is expected to increase by a range of 10% to 15% this year, said Wood Mackenzie.

Shell hasn't pulled out of East Africa altogether. It has licenses off the coast of Tanzania's semiautonomous region of Zanzibar and in Somalia, but exploration is being held up by political disagreements with little resolution in sight.

In contrast, Shell plans to start to drill deep-water wells offshore Benin, Gabon and Nigeria this year, and could start to explore the Orange Basin, off the northwestern coast of South Africa, next year, Mr. Henry said.


Benin neighbors Ghana, where Tullow Oil PLC and Anadarko have made significant discoveries, and Gabon has an established oil industry. The deep-water portion of South Africa's Orange Basin has evidence of source rocks that have potential for significant commercial oil and gas discoveries, Shell said on its website. The company declined to say how much of its exploration budget it will spend in those countries.


West Africa could prove to be a better bet for Shell. Prospects there are typically more oil-prone, whereas all recent discoveries offshore East Africa so far have yielded gas, said Andy Brogan, Ernst & Young's global oil-and-gas transactions leader.


Offshore oil fields are more attractive because compared with gas fields they can take half the time to develop, Mr. Brogan said. In the case of Mozambique, development of the discoveries will require multibillion-dollar investments in complex infrastructure to liquefy the gas so it can be exported, he added.

For all the attraction of big deal-making, oil companies and their investors also typically prefer to deliver exploration success over acquisitions, said RBC Capital Markets analyst Peter Hutton. "Who wins on acquisition? It's just the company that stumps up the most money," Mr. Hutton said. In contrast, he said, there is no better way for an oil company to show its expertise than selecting a good opportunity and making a major discovery.

Source : Neftegaz.RU