Shell Inks $1.8 Billion Deal for Cove Energy

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(Image: Stock.xchng)
(Image: Stock.xchng)

BUSINESS

  • Shell acquisition of Cove represents significant opportunity to enter hydrocarbon market in Mozambique and Kenya
  • Vast gas reserves in East Africa could make it a key natural gas industry player
  • Shell to increase East Africa exploration budget by 35% to $5 billion

Royal Dutch Shell has agreed to a $1.8 billion deal for the buyout of gas exploration company Cove Energy as it pushes to gain access to huge gas reserves in East Africa.

Shell’s Exploration and Production subsidiary upped an earlier bid by 10% for the Mozambique-focused natural gas explorer, which recommended that the Anglo-Dutch oil giant match an offer from Thai state-run PTT Exploration and Production.

Shell elected to meet, but not better, the Thai company’s offer, banking on its vast industry expertise to help seal the agreement.

The acquisition is subject to approval from Mozambique’s government, which says that any foreign operator would have to ensure some of the gas is kept for domestic use.

Vast Gas Reserves in East Africa

Recent discoveries of vast gas reserves in East Africa have sparked huge interest among major oil and gas firms. Experts say the region could soon become a key player in the natural gas industry, particularly in the Asian market, as the appetite for energy among emerging economies soars.

Shell says the acquisition of Cove represents a significant opportunity to enter into the hydrocarbon market in Mozambique and also Kenya. "East Africa is a major prospective hydrocarbon province, which has seen a significant increase in exploration activity in recent years," the company said in a statement.

The door remains open for rival companies to make higher bids, though analysts predict Cove will stick with Shell.

Andrew Matharu, an analyst at financial group Westhouse Securities, says Mozambique’s government has grand plans for the development of its natural resources and that it requires a major, proven partner to make them a reality.

“A project of this scale needs an oil major with the financial resources and the expertise of bringing world-class scale projects to fruition, so you need someone like a Shell," Matharu told Reuters news agency.

Shell has so far been unsuccessful in tapping into the East African hydrocarbon market; last year it teamed up with Brazil’s Petroleo Brasileiro seeking gas and oil reserves off the coast of Tanzania but failed to find anything significant.

The company intends to up its exploration budget in the region by 35% to around $5 billion this year.

Shell Rivals Present in East Africa

Rival companies such as Norway’s Statoil and Britain’s BG Group have already made discoveries in Tanzania. Italy’s Eni has also secured a deal for gas reserves nearby Cove’s Rovuma basin.

Authorities in Southern Africa have repeated calls for some gas to be reserved for domestic use, saying that shipping all the gas to Asian markets like India and China would limit potential regional benefits.

Key Statistics - Global Oil Industry (source: MarketLine)

  • In 2010, the worldwide oil & gas industry saw total revenue of over $2.5 trillion, representing an annual growth rate of over 3% between 2006 and 2010.
  • Oil & gas consumption grew at a rate of 0.5% per year over the same period, topping 42.5 billion barrels of oil equivalent (BOE) in 2010.
  • Industry performance is expected to rise at an annual rate of 7% for the period 2010-2015, which is forecast to push the market value to around $3.7 trillion through 2015.

By James Mulholland for
James Mulholland is a Paris-based internet and broadcast journalist specializing in sports, current affairs and technology news, while also freelancing as a photographer.

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