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Shell Targets Elusive Gas With Bid

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Shell Targets Elusive Gas With Bid

Deal of $5.87 Billion 
For Duvernay Takes 
Aim at Hard Sources
By GUY CHAZAN
July 15, 2008; Page B9

LONDON — Royal Dutch Shell PLC offered to buy Calgary, Alberta-based Duvernay Oil Corp. for US$5.87 billion, in a move that would bolster its presence in “unconventional” oil and gas, fast emerging as one of the Anglo-Dutch major’s key strengths.

The offer Monday was a rare event in the oil and gas sector, at a time when the soaring price of crude is driving up companies’ valuations and deterring would-be suitors. Eager to add new reserves, Shell has been one of the few oil majors prepared to make headline-grabbing deals in such a climate. Last year, it bought out the minority shareholders in its Shell Canada unit for $8.7 billion Canadian dollars ($8.62 billion).

The acquisition of Duvernay, which produces “tight,” hard-to-extract gas in dense rock formations, would underline Shell’s focus on unconventional oil and gas. Shell is using state-of-the-art technology to squeeze crude out of Canada’s gooey tar sands and is producing tight gas in places such as South Texas and Pinedale, Wyoming. Such reservoirs were long ignored by the oil industry as too expensive to exploit, but crude and gas prices and advances in technology have encouraged the majors to take another look. Exxon Mobil Corp. and BP PLC also have invested in tight gas.

Shell made an offer of C$83 a share, 42% more than Duvernay’s Friday closing price of C$58.44 on the Toronto Stock Exchange. Duvernay’s board voted to recommend the offer to shareholders. It is conditional on Shell’s gaining at least two-thirds of Duvernay’s common shares outstanding. Duvernay’s directors have committed to selling their own shares, which represent 18.1% of the company. Tom Ellacott, an analyst with oil consultancy Wood Mackenzie, said the move fits Shell’s strategy. “We had been expecting them to make more moves in North American gas,” he said. “They’ll be looking to replicate the success they’ve had in the Rockies.”

The shift to unconventional oil and gas sources comes as the big Western oil companies face growing turbulence in their traditional areas of operations. Militant attacks have forced Shell to suspend a large chunk of its oil production in Nigeria. In Russia, Shell was pressed into selling a stake in a big energy project to state gas company OAO Gazprom, after months of harassment by regulators. Exxon exited Venezuela under threat of asset expropriation.

In contrast, Canada offers a stable investment climate and has rolled out the welcome mat to foreign oil majors. Analysts said the offer price was high. Duvernay, a small player, produces only 25,000 barrels of oil equivalent a day, though it has plans to increase that to 70,000 by 2012. But it has 450,000 acres — or 180,000 hectares — of landholdings in Alberta and northeastern British Columbia, two areas rich in unconventional gas. British Columbia in particular has turned into a honey pot for prospectors, with major gas discoveries in places such as Montney and the Horn River Basin.

Write to Guy Chazan at [email protected]

http://online.wsj.com/article/SB121604343453850851.html

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