A Review of the Nigerian Energy Industry

Shell backs off from East African gas deal

East Africa gas play28 May 2013, Dow Jones News Wires, THE HAGUE, Netherlands – 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.

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