BREAKINGVIEWS-Shell can afford to let Cove Energy go

Wed Feb 29, 2012 9:13pm IST

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The author is a Reuters Breakingviews columnist. The opinions expressed are his own)

By Kevin Allison

LONDON, Feb 29 (Reuters Breakingviews) - Few energy companies look better-positioned than Shell to make Cove Energy into a money-spinner. If only it were so simple. It took just two days for Thailand's PTT to top the oil major's $1.6 billion all-cash offer for the Africa-focused explorer with its own $1.8 billion bid. Now potential Indian bidders are circling. The prize is an 8.5 percent stake of a large block in the Rovuma basin off the coast of Mozambique. Shell could probably justify paying a bit more, but it needn't get dragged into a bidding war. There are alternatives.

Shell isn't being stingy. Last week's offer was pitched at a 70 percent premium to Cove's share price before it put itself up for sale in January. But for state-owned Asian rivals, energy strategy may trump price. Asia is short of gas, and the field's position off the Eastern coast of Africa makes it an ideal base for exports to Indian Ocean ports. Cove's stake in Rovuma Offshore Area 1, thought to contain up to 30 trillion cubic feet of gas, would secure some long-term supply.

Shell might be tempted to pay a bit more to clinch a deal, particularly if it came with pre-emption rights over subsequent sales in the block. But even if Cove goes elsewhere, Shell has some advantages for future bids. The Mozambique government, which has to approve any deal, will be mindful that Shell has the highest concentration on gas of the oil majors, with extensive experience delivering big LNG projects.

Existing shareholders in Rovuma lack the wherewithal to develop the field themselves. Anadarko, the block's 36 percent owner-operator, is a savvy explorer but relatively inexperienced in LNG. It seems likely to reduce its stake once the project enters a more intensive development phase. Smaller shareholders such as Videocon, the Indian conglomerate (10 percent), may also be persuaded to sell. So might Italy's Eni, 70 percent owner of an adjacent patch of seabed thought to contain equally huge amounts of gas.

Shell may covet Cove, but it shouldn't be afraid to let its quarry go if the bidding gets out of hand.

CONTEXT NEWS

-- India's ONGC and GAIL this week became the latest energy groups to say they are considering an offer for Cove Energy, an Africa-focused oil and gas explorer. The state-owned gas companies have yet to decide whether they will make an offer, according to a regulatory filing published on Feb. 28.

-- The filing came after the Times of India reported that the state-owned energy groups were planning offer $2 billion for Cove, whose main asset is an 8.5 percent stake in a giant gas field off the coast of Mozambique.

-- Speculation about an Indian bid comes less than a week after the exploration arm of PTT, a Thai state-owned oil group, offered $1.8 billion for Cove, topping an earlier $1.6 billion offer from Royal Dutch Shell, the Anglo-Dutch oil major.

-- The Rovuma Offshore Area 1 block is thought to contain up to 30 trillion cubic feet of natural gas. Cove also owns minority stakes in other exploratory fields in Mozambique, Tanzania and Kenya.

-- Reuters: Indian group may trump Shell's gas bid for Cove Energy

-- For previous columns by the author, Reuters customers can click on

(Editing by Edward Hadas and David Evans)

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