Shell Nixes East Africa Gas Deal, Returns To Exploration

Shell Nixes East Africa Gas Deal, Returns To Exploration

From Wall Street Journal.

Unable to buy a share of its gas discoveries off the coast of Mozambique, Royal Dutch Shell plans to return to a focus on gas exploration in the West African heartlands and begin drilling for the first time in deep water off the coast of Benin, Gabon and South Africa.

Shell 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, according to a report in the Wall Street Journal.

Shell plans to start drilling 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.

Benin neighbors Ghana, where Tullow Oil and Anadarko Petroleum Corp. have made significant discoveries, and Gabon has an established oil industry. The deep-water portion of South Africa’s Orange Basin has evidence of potential for significant commercial oil and gas discoveries, Shell said on its website, according to the report.

The company declined to say how much of its exploration budget it will spend in those countries.

Largely shut out of acquisitions, companies such as Shell have instead ramped up their spending on exploration, according to the Wall Street Journal. In the past two years, Shell says it 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, almost a 10 percent increase from 2012 and about double the $3.7 billion spent in 2011.

The Anglo-Dutch Shell energy company pulled back from a deal with Anadarko to buy rights to drill off Africa’s East Coast when the asking price went too high, according to the Wall Street Journal. Shell also lost a bidding war in 2012 to a Thai oil company.

Analysts say Shell’s new drilling plans may deliver better value for shareholders.

Companies such as Shell have offset shrinking reserves in the past by buying smaller companies with new discoveries. Shell had one of the worst years on record for replenishing declining reserves in 2012, according to the report, replacing  just 44 percent of the oil and gas it produced during the period with new resources.

The option to buy drilling rights is fading in the face of competition from energy-hungry Asian countries, backed by their governments, whose priority is to guarantee secure energy supplies rather than shareholder returns, the Wall Street Journal says. Under these circumstances, assets such as the Mozambique gas fields are increasingly unaffordable.

Anadarko was looking to sell up to 10 percent of the Mozambique discoveries estimated to hold up to 65 trillion cubic feet of gas. There was a lot of interest from many players including major oil companies, a spokesman said in an earlier report.

Government-backed Chinese oil companies spent the most on oil and gas acquisitions in 2012, and that’s expected to continue in 2013, according to Wood Mackenzie consultants, the report said. International oil companies, in contrast, spent the least in eight years on assets in 2012.

Read more in Wall Street Journal.