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Oil price could fall to $70 in 2012 amid volatility, Shell warns

Feb 3rd, 2012
by John Donovan.
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Oil prices could fall to $70 a barrel during 2012, from current levels above $110, as high volatility in the economy and energy markets becomes “a fact of life”, Royal Dutch Shell executives said.

By Emily Gosden: 3 February 2012

The oil giant unveiled its 2011 results on Thursday, with a 54pc jump in full-year profits to $28.6bn (£18.1bn).

High oil prices helped to compensate for a tough fourth quarter in which Shell reported a loss in its ‘downstream’ refining and marketing division.

Shell’s chief executive, Peter Voser, outlined an aggressive long-term growth strategy, focused on ‘upstream’ exploration and production. He said the strategy would help Shell ride out volatility and increase cash flow by up to 50pc over the next four years. It would spend $30bn in 2012, with more than 60 projects under construction and in design.

“The global economy and energy markets are likely to see continued high volatility,” he said, due to a combination of robust structural growth and “unprecedented geopolitical events” such as the Japanese earthquake, eurozone crisis and the Arab spring.

“Both volatile macro and volatile earnings are now a fact of life for our industry,” he said. “We deal with this by staying focused on longer-term trends.”

Mr Voser said Shell used “conservative ranges” in its assumptions about oil prices to assess risk when planning projects, to ensure they break even – even if prices fall. “We plan inside a $50-$90 range for oil,” he said.

Discussing the $50-$90 planning range, Simon Henry, Shell’s chief financial officer, told analysts: “I’m not sure we see it right at the bottom of that one over the next 12 months, but we could certainly see it in the middle of that range,” he said.

However, Mr Henry said that the company’s target of up to 50pc cashflow growth in the next four years was based on oil remaining above $80.

“Our cash flow from operations was $136bn for 2008-2011, over the four year period during which the average oil price was $87,” he said. “In the next four years we are expecting cash flow from operations to be 30pc to 50pc higher than that, around $175-$200bn in four years, assuming $80-$100 Brent oil prices.”

Shell’s results were slightly below expectations, which had already been lowered recently as the extent of the downturn in the refining industry became apparent.

Fourth quarter earnings for 2011 on a current cost of supply (CCS) basis – the oil industry’s preferred measure that strips out inventory value changes – were $6.46bn, down 11pc on the previous quarter, but up 13pc on the same quarter in 2010. It saw a $278m loss in downstream in the quarter, compared with a $482m profit in the same period of 2010.

Mr Voser said: “Our fourth quarter results were impacted by a sharp downturn in industry refining margins and North American natural gas prices.”

Shell said it planned a dividend for the first quarter of 2012 of $0.43 a share, up 2pc on the first quarter of 2011 but below some expectations.

It also said it had sold a 20pc stake in a Canadian shale gas project to PetroChina, in a deal estimated to be worth $1bn. Shares closed down 28.5p at £22.97.

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PetroChina Boosts Shell Ties With 20% Stake in Shale Project

Feb 3rd, 2012
by John Donovan.
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February 02, 2012, 11:40 AM EST

By Bloomberg News

Feb. 3 (Bloomberg) — PetroChina Co., the country’s biggest energy producer, boosted ties with Royal Dutch Shell Plc after agreeing to buy a 20 percent stake in its Groundbirch shale-gas project in Canada.

Shell will remain the operator of the project, Mao Zefeng, the Beijing-based senior assistant secretary to PetroChina’s board, said by telephone yesterday. He declined to give the value of the transaction.

PetroChina plans to pay more than $1 billion for a stake in the Groundbirch property, Hong Kong-based FinanceAsia reported on its website, without saying where it got the information. Shell and PetroChina’s parent agreed in June 2011 to increase cooperation in energy exploration in China, estimated to hold the world’s largest reserves of shale gas.

“Although PetroChina will gain just a minority stake, the firm can re-deploy any advanced technologies acquired overseas back home to better exploit China’s vast shale-gas reserves,” Gordon Kwan, head of energy research at Mirae Asset Securities Ltd. in Hong Kong, said by e-mail.

The deal with Europe’s biggest oil company is an extension of the companies’ cooperation in China, Mao said. Shell and China National Petroleum Corp., PetroChina’s parent, completed the country’s first horizontal shale-gas well in March.

LNG Exports

“The shale-gas project will continue to supply Shell’s customers in North America,” Mao said. “In the long term, we will explore the possibility of exporting it to Asia in the form of liquefied natural gas.”

PetroChina won’t release detailed “numbers” on the deal with Shell as the size of the transaction isn’t big, he said.

“I can confirm that CNPC will join us in Canada,” Shell’s Chief Executive Officer Peter Voser said in London yesterday. “It’s part of our global partnership to optimize our business working environment inside and outside China.” He declined to give the value of the deal.

The unit of CNPC has gained 4.1 percent in Hong Kong trading in the past year, compared with the 13 percent slump in the benchmark Hang Seng Index. The stock rose 1.9 percent to close at HK$11.62.

PetroChina expects to surpass its target of producing 1 billion cubic meters of shale gas in 2015, Mao said in an interview in Beijing. Commercial output of “a few hundred million” cubic meters is possible by 2013, according to Mao.

“We’re making good progress in drilling,” he said. “The question is now not whether China has shale gas, but how we can streamline the production process and deliver the scale.”

Chinese Shale Gas

PetroChina and domestic rivals are seeking technology to tap China’s shale gas resources through partnerships and acquisitions. Cnooc Ltd. acquired stakes in U.S. shale-gas acreage from Chesapeake Energy Corp. for a total of $1.65 billion in February 2011 and November 2010.

China, which has yet to produce shale gas commercially, may hold 1,275 trillion cubic feet (36 trillion cubic meters) of the fuel, almost 50 percent more than the U.S., according to the Energy Information Administration. The Chinese government held its first auction of shale-gas exploration rights last year.

“The overall environment is good for commercialization of unconventional gases, as tough carbon emissions guidelines have made natural gas the cleaner energy resource compared with oil and coal,” Mao said.

China plans to ease price controls and allow domestic fuel suppliers to earn a profit. Gas importers are losing money as they typically buy at overseas rates that are higher than the fixed domestic prices they are allowed to charge customers.

“The reform on the natural-gas price mechanism makes the commercial production of shale gas more likely, as a higher price will certainly provide more incentive for energy companies to speed up production,” Mao said.

–Guo Aibing and Chua Baizhen. Editors: Stephen Cunningham, Randall Hackley.

To contact the Bloomberg staff on this story: Aibing Guo in Hong Kong at aguo10@bloomberg.net

To contact the editor responsible for this story: Amit Prakash at aprakash1@bloomberg.net.

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Can Big Oil Repeat Its Big Year?

Jan 23rd, 2012
by John Donovan.
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JANUARY 23, 2012

By LIAM DENNING

Even today, $1.67 trillion is a lot of money. That is the amount wiped off the combined market capitalization of the top 50 energy companies between the end of 2007 and the end of 2011. Breaking it down offers big clues on Big Oil’s prospects for 2012.

Every year, PFC Energy, a Washington, D.C.-based consultancy, ranks the top 50 listed energy companies in the world by market value. The latest, due Monday, has a surprise. The biggest gainers in 2011 were the dinosaurs of oil and gas: the supermajors. Their collective value increased by 8%, compared with a 7% decline for the PFC Energy 50 overall. It is only the second time they have led the field in the ranking’s 13-year history.

Conventional wisdom holds this shouldn’t be the case. Faith in the supermajors—Exxon Mobil, Chevron, Royal Dutch Shell, BP, ConocoPhillips and Total—has waned as state-backed rivals like PetroChina have emerged and smaller competitors have opened up new frontiers like U.S. shale. Seemingly too big to grow but too small to offset the power of petro-states, the supermajors have been priced for decline.

Why did investors fall in love with them again in 2011? First and foremost: security. The S&P 500 ended 2011 down slightly after wild swings. In choppy markets, scale and cash payouts provide comfort. And the supermajors, with a collective value of $1.2 trillion at year end, provide it in spades. The three U.S. ones alone paid out 9% of all S&P 500 dividends and buybacks in the year ended September 2011, according to data from Standard & Poor’s and Capital IQ.

So how about that missing $1.67 trillion? It is gone despite the average price of Brent crude being 53% higher in 2011 than in 2007 (and 13% higher than in 2008, year of the super-spike). About half of that market value was lost by listed state-controlled national oil companies, or NOCs, like PetroChina. State support has its advantages, but it also means NOCs serve two masters: markets and mandarins. That makes them riskier investments.

While the NOCs in the ranking lost 44% of their value between 2007 and 2011, the supermajors declined by just 22%.

But it isn’t just safety that helped the supermajors lead the charge in 2011. Chevron, Exxon and Shell likely all delivered cash flow per share growth of 30% in 2011, well ahead of the traditional growth stocks of the exploration and production sector, according to Credit Suisse.

Ed Westlake, analyst at Credit Suisse, says the oil majors are more sensitive to oil prices than many investors think. In part, that is because much of their global natural-gas production is sold at prices linked to oil, rather than at the depressed, de-linked levels that prevail in the U.S.

This year, the supermajors are forecast to make $67 billion in free cash flow, according to FactSet Research Systems. That is down slightly from 2011′s expectation but still equates to a healthy free cash flow yield of 5.6%.

Goldman Sachs points out, however, that unlike a year ago, supermajor stocks enter 2012 trading at a slight premium to their smaller integrated oil peers. That, coupled with the fact that 2011′s cash-flow surge is unlikely to be repeated, means some investors’ gains may be redeployed into other energy stocks.

It seems unlikely that the supermajors will register the biggest gains in the PFC Energy 50 2012. That doesn’t make them a bad investment. With markets still unsettled—Europe, in particular, remains unpredictable—Big Oil will likely remain a safe haven. Stocks don’t always have to be the biggest winners to be reliable repositories of value.

Write to Liam Denning at liam.denning@wsj.com

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Shell-PetroChina gas project hits record output

Jan 12th, 2012
by John Donovan.
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Jan. 11, 2012, 11:34 p.m. EST

By Wayne Ma

BEIJING -(MarketWatch)- The Changbei natural gas project owned by PetroChina Co. PTR +0.27% and Royal Dutch Shell PLC in northern China produced a record 3.5 billion cubic meters in 2011, the official Xinhua news agency reported late Wednesday.

The facility’s gas output was up slightly from 2010, when 3.48 billion cubic meters were produced.

The joint venture, located in Shaanxi province, has produced a total of 18.33 billion cubic meters since it began operations in 2005, Xinhua said, citing Tang Jiaqing, an official with the Changqing oil field, which operates the Changbei field.

The two energy companies are also cooperating in other gas projects in China. In December, PetroChina and Shell discovered shale gas in Sichuan province, and their gas exploration work in the Fushun-Yongchuan block is ongoing.

Changbei’s natural-gas reserves are estimated at 96.1 billion cubic meters, Tang said, according to Xinhua. He added that the joint venture plans to produce a combined 48 billion cubic meters between 2005 and 2025, Xinhua reported.

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Shell CEO Says the Potential for Shale Gas in Europe Is Limited

Jan 11th, 2012
by John Donovan.
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By John Buckley

Jan. 11 (Bloomberg) — Royal Dutch Shell Plc chief Peter Voser said the potential for shale gas development in Europe is limited by the region’s regulations and its dense population.

Shell expects expansion in shale and tight gas — which is locked in rock that’s difficult and expensive to break — in North America, China and Australia, and has signed a deal in Ukraine, the chief executive officer said in an interview in Shell Venster, the company’s Dutch-language personnel magazine.

“We are looking further at possibilities in Europe, but the development of shale gas there will be limited as a result of regulation, legislation, high population density and the challenge of obtaining permits,” he said in the interview.

Shell, based in The Hague, applied for permits to drill for oil in Arctic regions this year and next, he said. “We have all the permits we need but we have a long way to go before we start drilling. The emphasis is on Alaska and to a certain extent Greenland, and in Russia some possibilities may arise.”

The company said in September it agreed to invest as much as $800 million to explore for oil, natural gas and shale gas in Ukraine. Shell will cooperate with Ukraine’s Ukrgasvydobuvannia to explore six license areas covering about 1,300 square kilometers (500 square miles) in the Kharkiv region. Drilling of the first deep exploration well would begin this year, it said.

–With assistance from Eduard Gismatullin in London. Editors: Tony Barrett, Randall Hackley

To contact the reporter on this story: John Buckley in Amsterdam at johnbuckley@bloomberg.net

To contact the editor responsible for this story: Stephen Voss at sev@bloomberg.net

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Chevron, Conoco Entrapped in Post-BP Crackdown on Oil Slicks

Dec 23rd, 2011
by John Donovan.
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By Joe Carroll, Juan Pablo Spinetto and Edward Klump – Dec 23, 2011 10:15 AM GMT

Brazil’s threatened indictment of Chevron Corp. (CVX) and Transocean Ltd. (RIG) executives after offshore oil leaks shows that regulators from the North Sea to the Indian Ocean are stepping up scrutiny after BP Plc’s 2010 disaster.

Brazilian authorities have said they may prosecute employees, shut operations and exact more than $10 billion in fines after the leaks at the Frade field 230 miles (370 kilometers) off the coast of Rio de Janeiro. The spill occurred 19 months after an explosion in the Gulf of Mexico killed 11 workers and triggered the biggest offshore U.S. oil spill.

Governments around the world are paying closer attention to how energy explorers drill into high-pressure deposits of crude and natural gas as much as 8 miles beneath the sea surface. Chevron’s Brazil incident took place after a ConocoPhillips (COP) leak in China and prior to what may be Nigeria’s biggest spill in a decade at a Royal Dutch Shell Plc facility.

“There’s been just such a rash of them that governments have got to act tough” with oil companies, Allen Brooks, a managing director at energy-investment bank PPHB LP in Houston and Chevron shareholder, said in a phone interview. Since the BP accident “every spill after that is heightened in terms of media attention and obviously government concern.”

ConocoPhillips was criticized by the People’s Daily, China’s Communist Party newspaper, for “negligence, cover-ups and cheating” in its handling of a June leak in Bohai Bay. Premier Wen Jiabao ordered a “thorough” investigation in September.

In Nigeria, Royal Dutch Shell (RDSA) shut its 200,000 barrel-a-day Bonga field this week after a tanker-loading accident caused less than 40,000 barrels of crude to leak.

Olympic Hosts

Brazilian officials are seeking 20 billion reais ($10.8 billion) in penalties from Chevron for the Nov. 7 leaks that the San Ramon, California-based company has estimated at 3,000 barrels.

The furor in a nation keen to protect beaches from floating globs of crude ahead of the 2014 World Cup and 2016 Olympic Games may lead to new drilling rules so tough that oil exploration becomes unprofitable, said Adriano Pires, an economist and former adviser to Brazil’s state oil ministry.

“What I fear is now we have a circus created around the Chevron problem, a real circus, and to show the people they are doing something they may create norms, legislation and proceedings that make it impracticable to get environmental licenses for offshore exploring,” Pires, head of the Brazilian Center for Infrastructure, a Rio-based energy-industry consultancy, said in a telephone interview.

Making Exploration Expensive

“Depending on the measures that the government may take, it would make oil exploration in Brazil much more expensive,” he said.

Brazil’s federal police have said they intend to indict employees involved in the drilling that led to leaks from sea floor fissures near the $3.6 billion development, Kurt Glaubitz, a spokesman for Chevron, said in a Dec. 21 e-mail. In a separate statement, Transocean, owner of the drilling rig leased for the Frade field, said it will defend the company.

Chevron underestimated the amount of pressure at an oil deposit it was exploring, and crude leaked from the reservoir for about eight days, George Buck, president of Chevron’s Brazilian subsidiary, said on Nov. 20. Buck was among 17 Chevron and Transocean employees targeted for indictments, the Folha de S. Paulo newspaper reported on Dec. 21. Glaubitz declined to identify the employees targeted for indictment.

Foreign Investment ‘Chill’

“I’m a little surprised by the stance that you’re seeing in Brazil, largely because it’s so excessive, potentially, that you could put a very big chill on foreign investment in the deep water,” Ted Harper, who helps manage about $6.8 billion in assets at Frost Investment Advisors in Houston, including about $50 million of Chevron shares, said in a phone interview.

The response so far in Brazil is an “overreaction,” he said.

Chevron has lagged its peers since the leaks were disclosed on Nov. 10. Chevron has gained 0.8 percent since then, compared with increases of 7.1 percent and 4.9 percent, respectively, for Exxon Mobil Corp. (XOM) and Shell, the biggest Western energy companies by market value.

ConocoPhillips, the third-largest U.S. oil company, said on Dec. 21 that it’s taking responsibility for the Bohai Bay spill and is setting up compensation funds to support environmental research and affected communities.

Royal Dutch Shell, Europe’s largest oil company, said yesterday as much as half of the crude that leaked from the Bonga installation has dissipated through natural dispersion and evaporation. Bonga, located 75 miles off Nigeria’s coastline, pumps about 10 percent of the West African nation’s oil.

Worst Since 1998

The leak may have been the country’s worst since a January 1998 spill dumped an estimated 40,000 barrels into the sea from the Idoho platform on the southeastern coast, with slicks reported as far west as Lagos. Shell, the largest foreign oil producer in Nigeria, has been criticized by some local residents and foreign groups for onshore spills.

An “independent verification” of the Bonga platform incident is needed to ensure the spill wasn’t more, Nnimmo Bassey, executive director of Environmental Rights Action, said in a phone interview from Lagos. “Shell has never been forthcoming about incidents of oil spills in the past.”

BP has booked more than $40 billion in losses related to last year’s Gulf disaster that sank Transocean’s Deepwater Horizon rig and spilled an estimated 4.9 million barrels of crude. The London-based oil producer also faces hundreds of lawsuits by fishermen, hoteliers and property owners in coastal areas where crude washed ashore.

More Awareness

Unlike the BP incident in the Gulf, this year’s Brazilian and Chinese spills are within the normal range of oil industry accidents, Nansen Saleri, chief executive officer of Quantum Reservoir Impact LLC in Houston, said in a telephone interview.

“What’s different right now, post-Macondo, is that there’s far more awareness globally at all levels,” he said. In the long run, the industry will develop better and more stringent procedures to help prevent small incidents, he said, and oil and gas development will continue.

“Those countries who choose to go on a very punitive path at the end will suffer the negative consequences themselves,” said Saleri, who is a former reservoir-management chief at Saudi Arabia’s state oil company.

To contact the reporters on this story: Joe Carroll in Chicago at jcarroll8@bloomberg.net; Juan Pablo Spinetto in Rio de Janeiro at jspinetto@bloomberg.net; Edward Klump in Houston at eklump@bloomberg.net

To contact the editors responsible for this story: Tina Davis at tinadavis@bloomberg.net; Dale Crofts at dcrofts@bloomberg.net

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Shell’s Arrow Energy Cleared by Australia, China to Purchase Bow

Dec 16th, 2011
by John Donovan.
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December 16, 2011, 2:21 AM EST

By James Paton

Dec. 16 (Bloomberg) — Arrow Energy Ltd., the natural gas producer owned by Royal Dutch Shell Plc and PetroChina Co., won approval from Australia’s Foreign Investment Review Board to buy Bow Energy Ltd. for A$535 million ($534 million).

The transaction was also cleared by Chinese authorities, Brisbane-based Bow said today in a statement. The decisions follow approval earlier this month by the Australian Competition & Consumer Commission.

Arrow, seeking additional resources for a liquefied natural gas venture in Queensland state, agreed in September to increase its takeover offer to A$1.52 a share in cash from A$1.48. The accord was 72 percent more than Bow’s price of 88.5 cents in Sydney before Arrow made its initial offer Aug. 22.

Brisbane-based Bow was valued at between A$1.14 and A$1.53 a share by independent analyst Grant Samuel, the company said Nov. 17. Samuel found the deal “highly attractive,” given the uncertain economic and market conditions, the premium given to shareholders and the “remote prospect of Bow shares trading above A$1.52 per share in the foreseeable future,” Bow said.

Arrow, also based in Brisbane, plans the fourth LNG venture in Queensland to meet rising Asian demand, following approvals for more than $50 billion in developments led by BG Group Plc, Santos Ltd. and ConocoPhillips. The acquisition may allow Arrow to expand output at the venture’s first two units by as much as 15 percent, it said in September.

Bow expects the transaction to be completed Jan. 11, it said last month.

–Editor: Keith Gosman,

To contact the reporter on this story: James Paton in Sydney at jpaton4@bloomberg.net

To contact the editor responsible for this story: Andrew Hobbs at ahobbs4@bloomberg.net

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CNPC Relies on Shell, Exxon Mobil to Develop Chinese Shale Gas

Dec 8th, 2011
by John Donovan.
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December 08, 2011, 10:58 AM EST

By Wael Mahdi

Dec. 8 (Bloomberg) — China National Petroleum Corp. will rely on help from Royal Dutch Shell Plc and Exxon Mobil Corp. amongst others to develop its shale gas resources.

CNPC is working with Shell on a project in central China to develop shale gas, its president Zhou Jiping told reporters today in Doha, Qatar. The company has already made shale gas discoveries and it needs more time to develop them, he said.

“The tectonic movement in China is even stronger than in the U.S., and it’s making the structure more complex,” he said. China has more potential gas resources than the U.S., according to his estimates.

Chinese gas shale development will be more complex than in the U.S. because of a different geological formation, he said.

–Editors: Stephen Cunningham, Alex Devine.

To contact the reporter on this story: Wael Mahdi in Cairo at wmahdi@bloomberg.net

To contact the editor responsible for this story: Stephen Cunningham at scunningha10@bloomberg.net

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Shell strikes shale gas in China

Dec 6th, 2011
by John Donovan.
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By Tom Bergin

DOHA | Tue Dec 6, 2011 4:29am EST

(Reuters) – Royal Dutch Shell Plc has found shale gas in China, a development that could cap imports in a market natural gas producers are hoping will drive demand.

An official with Shell’s partner, PetroChina (601857.SS), a unit of the country’s top energy group, state-owned CNPC, said drilling results from two wells Shell drilled had been positive.

“Shell has two vertical wells and they got very good primary production,” Professor Yuzhang Liu, Vice president of Petrochina’s Research Institute of Petroleum Exploration and Development (RIPED), said in an interview at the sidelines of the World Petroleum Congress (WPC) in Doha.

“It’s good news for shale gas,” Liu, who regularly represents PetroChina at industry events around the world, told Reuters late on Monday.

China currently has no commercial shale gas production.

Some industry executives doubt the explosion of shale gas in the U.S. that has revolutionized the market there could be replicated elsewhere due to difficult geology, the lack of water availability or land access issues.

Liu accepted the rock formations in China were “different” from those in the United States but denied this meant they were more challenging or less bountiful.

In less than decade, shale gas has transformed the United States from gas shortage to a point where companies are planning to export liquefied natural gas (LNG), fundamentally altering the dynamics of the international gas market.

LNG projects freeze and squeeze natural gas into liquid for export in tankers. Many producers who were targeting the United States were forced to rethink their plans, and China, with its booming energy demand, was seen as the answer to their need for a market.

A Chinese ‘shale gale’ as the revolution was termed in America, could jeopardize that market too.

Shell declined to confirm the find but said in a statement;

“Shell will complete drilling activities by the year end… as planned.”

Chief Executive Peter Voser has previously said he has “great expectations” for Chinese shale but was cautious in his comments to the WPC on Tuesday.

“We are going through the exploration phase there and are exactly now analyzing what potential is available now in China,” he told a news conference.

In November 2009, PetroChina and Royal Dutch Shell agreed to jointly evaluate shale gas reserves of the Fushun-Yongchuan block in Sichuan basin.

Earlier this year, industry sources said Shell had started drilling two shale gas exploration wells in Fushun.

A U.S. Energy Information Administration report in April said China had 1,275 trillion cubic feet of technically recoverable shale gas resources — by far the largest in the world, followed by the United States with 862 trillion cubic feet and Argentina with 774.

(Reporting by Tom Bergin; Editing by Andrew Callus)

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Secret saga behind a 9 billion barrel block in Nigeria

Nov 19th, 2011
by John Donovan.
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From AFRICA ENERGY INTELLIGENCE 24 AUGUST 2011

After ten years of maneuvering and court cases, Shell ended up by offering to buy Malabu Oil & Gas’ offshore block OPL 245 (see our report in AE1 656). The stakes in the game were indeed high. lying alongside Total’s Akpo block, the acreage could contain up to 9.23 billion barrels. Amid rising calls for local ownership of Nigeria’s oil resources, the transfer of the country’s most promising license to a Western major could prove politically dangerous to the new government of president Goodluck Jonathan.

Malabu under siege

With Agip as its partner, Shell offered S1.3 billion to Malabu Oil & Gas for all of OPL 245 in early July. After fighting the Anglo-Dutch major for years in order to retain control of the concession, Malabu, founded and headed by former oil minister Dan Etete (1995-1998), had little choice but to accept: many other majors had been jockeying for years for a piece of OPL 245, and particularly China National Petroleum Corp, China National Offshore Oil Corp and Taiwan’s China Petroleum Corp, but had backed away because of the fear of legal trouble with Shell.

Debuting on OPL 245 in 2000 as minority partner of Malibu, Shell got the government of Olusegun Obasanjo to evict its Nigerian partner in 2002 and remained the lone operator of the concession for four years. To recover its acreage, Malabu instigated legal action in the United States and Nigeria and finally recovered OPL 245 in 2006. However, Shell never resigned itself to the loss and continued to include OPL 245 among its assets logged in its annual reports, although specifying that its rights were “disputed.” When Shell was OPL 245′s operator, it drilled two wells in 2005, Etam 1 and 2, that identified no less than 1,08 billion barrels of probable reserves (PSO). According to a study carried out in 2007 by the geophysical consultancy Ikon Sciences, the total of probable reserves on OPL 245 could amount to 9 billion barrels.

High Risk Operation for Abuja

Shell and Malabu signed a memorandum of understanding early this summer but Nigeria’s Department of Petroleum Resources hasn’t yet approved the transaction. And for a very good reason: Malabu was awarded its license under an indigenization program and its production sharing contract specified that 40% of the acreage had to be owned by a Nigerian company.

Transferring the block to Shell would require drafting a new contract. Moreover, state-owned Nigeria National Petroleum Corporation won’t be involved in the operation. As a result, Shell’s acquisition of OPL 245 could appear starkly at odds with calls by the current oil minister, Diezani Alison-Madueke, to nationalize the country’s oil resources.

Legal Compromise

To speed up the Nigerian government’s decision on OPL 245, Shell discreetly laid to rest an arbitration procedure this summer that it had launched against Abuja in 2007 before the International Center for the Settlement of Investment Disputes (1(510), a wing of the World Bank. Shell demanded $500 million in damages and interest. The case, instigated by Ann Pickard, who was vice president for exploration and production for Shell in Africa at the time, deeply strained relations between the Anglo-Dutch giant and the Nigerian government. Shortly after Pickard’s departure (she has headed Shell Australia since 2009), her successor, Ian Craig, decided on switching strategy: arbitration against Nigeria was gradually set aside (the latest report to the arbitration tribunal was sent in May, 2010) and direct bargaining with Malabu began. It was those talks that led to the MOV in July.

Ten years of coverage on OPL 245 can be found on our site Africaintelligence.com in the report “Shell vs Malabu: the OPL 245 Saga”.

RELATED: Allegations surrounding Shell Malabu $1.3 billion Nigerian oil deal

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