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Shell makes £1.1bn Cove Energy bid

Category : Business

Oil company looks to take prime position in east African gas reserve market in face of competition from Asian firms

Shell has edged ahead of Asian competition in the scramble for east Africa’s gas reserves by making a recommended £1.1bn bid for Cove Energy.

The Anglo-Dutch group received the backing of Cove’s directors after matching a bid from PTT Exploration, the Thai-state controlled oil firm. Shell and PTT have been drawn to the company’s 8.5% stake in a natural gas block off the coast of Mozambique that may contain 30tn cubic feet of reserves – which can then be shipped across the Indian Ocean to the gas-hungry Asian market.

Shell acknowledged that other bidders could still announce “competing offers for Cove”, with Gail India and Oil & Natural Gas Corporation – both from the sub-continent – thought to be possible joint bidders. PTT said it was “considering its options” as analysts speculated that the company could return with a higher bid.

One analyst, however, said the Mozambique government was likely to back Shell as the bidder that offered the most expertise in extracting gas from the Rovuma Offshore Area 1 gas-block. The deal is conditional on government approval. Andrew Matharu, analyst at Westhouse Securities, said: “A key component of this is how the Mozambique authorities want to develop their resources and 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 Shell.”

Michael Blaha, Cove’s executive chairman, said he expected state backing. “I am confident, following our discussions with the government of Mozambique, that timely consent for Shell’s offer will be forthcoming.” Cove’s directors own 4.38% of the business, with the transaction valuing their stake at £42.5m. Analysts at Investec noted an increased in Cove’s share price in the wake of the Shell announcement and said PTT could return with a higher bid. “Competing offers can still be made and the shares will now likely trade to a slight premium on the hope that PTT will trump Shell,” said Investec analysts in a note to investors. Shell’s 220p a share offer represents a 13% increase on an initial offer of 195p a share, lodged in February.

Shell is seeking to reduce its dependence on oil in favour of gas and east Africa has emerged as a target area for energy majors with similar ambitions. Anadarko Petroleum, a US firm, owns a third of the Rovuma field, followed by Mitsui of Japan with 20%, with two Indian oil groups owning 10% each. Mozambique’s state oil company owns a 15% stake in Rovuma. Elsewhere, Italy’s Eni, Norway’s Statoil and the UK’s BG Group have also discovered gas off Mozambique and Tanzania, although Shell has not been successful so far.

Shell will increase spending on oil and gas exploration this year by 35% to $5bn and has a strong presence in the gas market as the world’s largest manager of ships for transporting liquefied natural gas (LNG) and supplied 30% of global LNG volumes last year. East Africa is tipped to become a major gas producing region in the wake of the Rovuma discovery, with China and India among the field’s likely Asian customers.

Shell and Cove did not comment on the capital gains tax issue that is clouding the sale process. Cove said last month that it will be subject to a tax rate of 12.8% on the capital gains from selling its Mozambique assets. Cove also owns assets in Kenya.

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