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Shell backs away from East Africa gas

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

Shell has pulled back from talks with Anadarko Petroleum, 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 PTT Exploration & Production.

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 CFO Simon Henry on the sidelines of the company' s annual general meeting in The Hague last week. Mr. Henry 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 Tcf 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.

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 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, it 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 rise by 10% to 15% this year, said Wood Mackenzie.

Dow Jones Newswires

05/27/2013

 

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