Shell Shut Out as Africa’s Gas Trove Lures Asian States: Energy

Asian state-owned oil companies are making inroads in the contest for East Africa’s energy reserves, gaining power in export projects that Western explorers like Royal Dutch Shell Plc used to dominate.

Fields off Mozambique’s Indian Ocean coast are estimated to hold enough gas to meet global demand for two years, a prize that persuaded state-owned China National Petroleum Corp. to make its biggest foreign investment. The Beijing-based company agreed to pay Italy’s Eni SpA $4.2 billion last month for a share in the fields and a planned liquefied natural gas plant. While it’s the first time Asia’s state producers have participated in an African LNG project, companies from China, India, South Korea and Thailand now hold 24 percent.

State producers “have a national interest initiative to secure significant gas reserves and they can’t ignore a reserve of this size,” said Brett Olsher, the global co-head of natural resources at Goldman Sachs Group Inc. “Unlike in a number of LNG projects, in Mozambique there isn’t one dominant supermajor, which provides an opportunity for national oil companies.”

Mozambique, Tanzania and Uganda are the stage where power over natural resources in developing nations is shifting from traditional managers like Shell and Exxon Mobil Corp. toward state oil companies such as CNPC and Thailand’s PTT Production & Exploration Pcl. They answer to Asian governments that need to fuel economies growing at least twice the Western average.

LNG plants need billions of dollars in investment before they can start chilling gas into a liquid and load it on tankers for export. Western competitors like Shell, the world’s largest LNG trader, are now operating in a more crowded gas market. That makes it harder to secure participation in projects that can offer decades of profits.

Behind Qatar

Eni and Anadarko Petroleum Corp., the two companies leading the project, plan four production units in Mozambique with a total capacity of 20 million tons a year, making it the world’s second-largest export site behind Ras Laffan in Qatar, where Exxon Mobil Corp. is a partner.

As things stand, Mozambique would be the biggest LNG project without the participation of one of the so-called supermajors: Exxon, Shell, BP Plc, Chevron Corp. and Total SA.

Even so, Western investor-owned companies have proved a better investment in the past year, as they’re less likely to sell fuels at a loss in their home markets.

The Dow Jones Oil & Gas Titans index, whose biggest members are Chevron and Exxon, has dropped 1.5 percent in the period, compared with a 8.5 percent loss in the state operator-heavy Dow Jones Emerging Markets Titans Oil & Gas 30 Index, led by Russia’s state-run Gazprom.

Equal Partner

“Just being commercial buyers is seen as expensive,” said Laura Loppacher, an analyst at Jefferies & Co. in London. “Because of their lower cost of capital and the higher strategic benefits, the national companies are able to pay more” for the fields.

China’s state-owned Cnooc Ltd. became an equal partner with France’s Total SA and Tullow Oil Plc of the U.K. last year in a group developing oil fields in Uganda. In Tanzania, where Chinese President Xi Jinping visited last month, the Export-Import Bank of China is lending $1.2 billion to build a natural-gas pipeline.

Mozambique may have 250 trillion cubic feet of gas reserves, according to Empresa Nacional de Hidrocarbonetos, the country’s state-backed petroleum exploration company that’s a shareholder in the fields.

Eni, Europe’s No. 5 producer, is the largest non-Asian company in Mozambique’s proposed LNG project. Bangkok-based PTT outbid Shell last year for chunk of the asset. Bharat Petroleum, 54 percent owned by India’s government, and Korea Gas Co. are also shareholders.

Faster Growing

Asia consumes more LNG than any other region and faster-growing economies are eager to secure future energy supplies, giving their state-backed companies a strategic imperative to make deals in Mozambique. Owning the producing assets is a natural hedge against rising LNG prices for energy importers, Loppacher said.

There could be room for more state-run Asian investors. Mozambique’s gas finds to date have been made in two offshore blocks: Area 4, led by Italy’s Eni, and Area 1, where Woodlands, Texas-based Anadarko is the lead shareholder. The two blocks will be combined for the LNG project.

Anadarko is seeking buyers for a 10 percent stake in Area 1 alongside an equivalent sale by Indian media group Videocon Industries Ltd. Among bidders for that stake are India’s Oil & Natural Gas Corp. and Oil India Ltd., both state-run energy companies.

Losing Out

Still, they won’t be the only bidders. It’s possible Shell will have another go at buying into Mozambique after losing out to PTT Exploration and Production to acquire a stake last year, according to people with knowledge of the matter.

Shell spokesman Jon French declined to comment on whether the company will take part in the bidding process.

Projects like the one in Mozambique are likely to feature “more collaboration between the independent oil companies and the national oil companies” than has been the norm in past LNG efforts, said Jon Clark, a mergers and acquisitions partner at Ernst & Young in London.

Eni was reluctant to partner with another Western oil company as it sought buyers for part of its stake, preferring to collaborate with Asian players with whom it’s trying to build a stronger relationship, according to a person familiar with Eni’s thinking.

With Mozambique’s per capita gross domestic product lower than Rwanda’s, the stakes are high. The country has little experience in managing mineral wealth and is still building ports, roads and railway lines. Rio Tinto Group had to write down 70 percent of its $4 billion investment in Mozambique’s coal industry because of a lack of transport capacity and a drop in the price of the fuel.

“The gas project is still an infant, and there are key decisions to be made to make sure to get it right,” said Jason Kenney, an analyst at Banco Santander SA in Edinburgh.

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