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Contracts Put Bidders Off Shell,Exxon Gas Assets-Sources

THE WALL STREET JOURNAL

AUGUST 10, 2010

By Jessica Hodgson and Jan Hromadko Of DOW JONES NEWSWIRES

LONDON (Dow Jones)–Royal Dutch Shell PLC (RDSB) and Exxon Mobil Corp.’s (XOM) jointly-owned gas storage business in Germany is proving a tough sell to both corporate and financial investors, according to people who have looked at the assets.

Though the assets in themselves–storage facilities for natural gas–are high quality, the contracts associated with them are the worst of all worlds: they aren’t long enough for the infrastructure funds who typically look at assets like this, and paradoxically are too long for strategic investors like European energy companies, dampening enthusiasm at both ends of the market.

The oil majors accepted a first round of bids for BEB Erdgas und Erdoel GmbH at the end of July. They could still attract valuations of between EUR600 million to EUR700 million, although some estimates are about half that and interest has not been as broad as anticipated, these people say.

“Everyone was excited about these assets originally, but many people have fallen away,” said one person who reviewed the teaser documents but decided against bidding.

BEB operates three underground facilities with capacity to store 2.8 billion cubic meters of natural gas, although the biggest of the three is not for sale.

The company derives revenue from fees paid to store gas–usually utilities build up stocks in the summer and draw them down in the winter. The bulk of BEB’s storage contracts expire in three to five years, rather than the decade or more infrastructure funds prefer because the longer-tem contracts offer more certain income.

“These are high quality assets,” a person at one fund that looked at the teaser document said. “The difficulty is that some of these contracts come up for renewal quite soon so there’s some risk there.”

Another person, who saw the original teaser, said that even relatively short-term contracts are a deterrent to strategic investors that would want the bulk of storage capacity for their own use.

“The contracts are too long-term to run the assets according to our needs,” said a person at one of Germany’s largest gas storage operators that had looked at the BEB assets, but decided not to make an offer.

Another potential bidder said financial investors are put off by the intention of Shell and Exxon to retain the management and administrative team associated with the assets after the divestment. As the management of the assets requires specialist knowledge, this poses an added problem, the person said.

UBS AG (UBS), which is running the auction for Shell and Exxon, is aware of the challenge associated with selling this asset, people say. UBS’s advisers on the deal have repeatedly declined to talk about the process.

Theoretically, the assets could be attractive to a very broad range of bidders, people from gas and energy giants like Germany’s E.ON AG (EOAN) and EWE AG, Russia’s OAO Gazprom (GAZP.RS), and Dutch Gasunie, to investment funds focusing on infrastructure. UBS targeted in particular the latter, people say.

Shell and Exxon didn’t immediately respond to requests for comment Tuesday.

E.ON, EWE, Gazprom and Gasunie declined to comment.

-By Jessica Hodgson and Jan Hromadko; Dow Jones Newswires; +44207 8429373; [email protected] (Marietta Cauchi, Jeffrey Sparshott, Eyk Henning and Maaike Noordhuis contributed to this report.)

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