Royal Dutch Shell has made no secret of its desire to expand in East Africa, but the bid battle for Cove Energy demonstrates the pitfalls of entering such a desirable region by buying out a publicly listed company. Cove’s share price was £1.13 ($1.77) on 4 January this year, the day before Cove announced it was entering a sale process to attract potential buyers. Only six months later the highest offer for the group from PTT was £2.40, and the share price reached as high as £2.70 on hopes of a bidding war between the Thai group and the Anglo-Dutch supermajor – hopes that were dashed this week when Shell declined to bid any more than £2.20 for Cove.
This inflation rate of more than 100% in half a year reflects the excitement surrounding East Africa as the ‘next big thing’ in the LNG market. The company’s decision to keep out of an auction process for Cove was widely praised by analysts, but still leaves it without any interests in the East African offshore apart from a string of deepwater licences in Tanzania. These licences are underexplored and drilling work is being held up by arguments between Dar es Salaam and the regional government of Zanzibar over profit sharing in any potential finds made there. The real prize lies along the Mozambique/Tanzania border.
The challenge for Shell is to find a way to enter the sector without getting caught in a bidding war. One option is a farm-in agreement for all or part of one of the most prospective licences. The price will again be high, but an agreement can be presented to the market as a fait accompli.
Commentators immediately picked up on Anadarko’s 36.5% stake interest in Offshore Area 1 and Bloomberg reported that the two sides had already started discussions. Anadarko would be the obvious choice, with a strong track record in traditional upstream exploration and production work but with little experience of large-scale LNG developments. The capital expenditure commitment on a two-train Mozambique LNG development would be $15 billion, according to estimates from Jefferies investment bank, resulting in a hefty $5.5 billion bill for Anadarko. Eni holds a 70% stake further offshore in Area 4, and would therefore face an even larger bill. The Italian group has been involved in big LNG developments before but is unlikely to want to shoulder such a large share alone.