Bloomberg News

Shell’s Cove Bid Starts Race for East African Gas Fields: Energy

February 28, 2012

Feb. 23 (Bloomberg) -- Royal Dutch Shell Plc’s $1.6 billion bid for Cove Energy Plc starts a race to develop natural-gas fields off Mozambique’s Indian Ocean coast that may hold more than Norway’s entire reserves.

Winning Cove would give Shell an 8.5 percent stake in a block where Anadarko Petroleum Corp. has found 30 trillion cubic feet of gas. Italy’s Eni SpA has discovered even more in a neighboring area. Together, there’s sufficient fuel for the development of two $20 billion liquefied natural gas plants to supply customers in Asia, according to Deutsche Bank AG.

“We’re a natural partner in that project,” Shell Chief Executive Officer Peter Voser said in an interview in The Hague yesterday. “We are the global leader in LNG, so this is an interesting province for us to actually further grow.”

East Africa’s fields offer a fresh source of gas supply for China and India, the world’s fastest-growing major economies. Demand for LNG in Asia is rising at almost 20 percent a year, outstripping the pace of production growth, according to Sanford C. Bernstein & Co. Prices in the region reached a record in November.

Shell won’t be the last company looking for a way into Mozambique. India’s Oil & Natural Gas Corp. was among Asian producers considering a bid for Cove and a counter-offer remains possible. At the same time, Eni and Anadarko have both said they’re willing to sell stakes in their discoveries.

“This move from Shell leaves other European majors behind,” said Alejandro Demichelis, a London-based analyst at Bank of America Corp., adding that BP Plc and Total SA are likely to want a role in Mozambique.

‘Assessing Opportunities’

Shell, Exxon Mobil Corp. and BP, which had also considered a Cove bid, according to London’s Sunday Times, are the biggest LNG producers among international oil companies.

Shell itself isn’t likely to settle for Cove’s 8.5 percent stake in Anadarko’s Rovuma fields and said yesterday it’s “assessing opportunities” to expand in Mozambique.

The Anglo-Dutch company so far had a limited presence in east African exploration. Since 2002, it has been negotiating four exploration licenses off of Zanzibar and Pemba islands, part of the semi-autonomous nation on an archipelago in the Indian Ocean. Shell had also drilled a dry well with Petroleo Brasileiro SA in Tanzania last year.

Cove is “too small for a company the size of Shell with ambitions and expertise in operating large scale LNG developments,” Demichelis said.

Northern Neighbor

London-based Cove jumped 26 percent to 194 pence in London trading yesterday after Shell offered 195 pence a share, or 992 million pounds ($1.6 billion). While Cove said yesterday it expects the board to recommend the offer, formal sales process for the company will continue.

The offer boosted the price of other U.K. drillers in east Africa. Ophir Energy Plc, which is looking for partners for its drilling campaign off Tanzania, climbed 7.3 percent and Afren Plc gained 5.9 percent.

Tanzania, Mozambique’s northern neighbor, also has the potential to support LNG projects. BG Group Plc has already found about 4 trillion cubic feet of gas there and Ophir CEO Nick Cooper said last month the geology that yielded Mozambique’s discoveries may extend across the border. Cove also has exploration rights.

East African LNG projects will compete with gas from Australia, where Shell, Chevron Corp. and other companies plan to invest about $250 billion in export projects to supply Asia. One of the attractions of East African gas is that projects will be relatively cheap, Bernstein analyst Oswald Clint said.

Gas Production

“We estimate that East African projects are likely to be significantly cheaper than Australian developments,” Clint said. Through Cove, Shell is also “adding in attractive frontier exploration acreage in Kenya and Tanzania,” he said.

Mozambique, a $24 billion-a-year economy that ranks 213 of 227 countries in the world for per capita income, has no significant natural-gas production.

The global gas market will be driven by demand from China, where LNG imports will more than double by 2015 to 30 million tons a year, trailing only Japan as a buyer by 2020, according to Bernstein. The average price of Japan’s LNG imports rose to a record $16.96 a million British thermal units in November, Japan LNG Corp. data show.

Anadarko’s Rovuma discoveries and Eni’s neighboring Mamba find, where the Rome-based company has found 40 trillion feet of gas so far, together contain 70 trillion cubic feet. Norway’s reserves in 2010 were 72 trillion feet, according to the BP Statistical Review of World Energy. Both companies plan more appraisal wells.

CEO Paolo Scaroni said Eni’s willing to sell part of the field. Anadarko, which has no track record in LNG, may also dispose of part of its Mozambique holding, Chuck Meloy, a senior vice president of worldwide operations, said Dec. 6.

“We’re talking about a phenomenal amount of gas to be discovered yet in East Africa,” said Ashwin Punde, a managing director for energy investment banking at Bank of America. Shell’s bid is a “classic example of a big company swallowing a minnow.”

--With assistance from Brian Swint in London. Editors: Will Kennedy, Todd White

To contact the reporters on this story: Eduard Gismatullin in London at egismatullin@bloomberg.net; Fred Pals in Amsterdam at fpals@bloomberg.net

To contact the editor responsible for this story: Will Kennedy at wkennedy3@bloomberg.net


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