Shell has pulled out of a $410 million preliminary agreement to buy a majority stake in the Ukrainian assets of a small, controversial energy company
Shell was the first multinational to get a foothold on the Ukrainian hydrocarbons market two years ago and has been expanding aggressively ever since. Last week, it appeared as if Shell had taken a major step expanding further into Ukraine. But within days, Shell announced it had withdrawn from a memorandum of understanding (MoU) with Regal Petroleum, a UK-based producer of oil and gas that is listed on the Alternative Investment Market (AIM) of the London Stock Exchange.
Shell said its decision was prompted by last-minute management changes at Regal – a company plagued by controversy over the past few years.
A statement released by Shell on Friday, Nov. 23, reads: “We recently signed a MoU for exclusive negotiations with Regal Petroleum plc regarding Ukraine assets. Our MoU with Regal was agreed with the previous management team. The management change of yesterday at Regal was not expected by Shell.”
On Nov. 22, Regal announced that it had replaced its chairman and CEO with a former Shell executive, David Greer, who has taken over both positions at Regal.
The news of Greer’s appointment came just a day after the Nov. 21 announcement of the MoU, which would have yielded Shell a 51 percent stake in two gas fields in Ukraine that are viewed as Regal’s most prized assets.
Shell accused Greer of making statements to the media that questioned Shell’s exclusive rights to purchase the majority stake in the Ukrainian assets under the memorandum.
“We see from the new management’s comments that they may have changed their thinking on this transaction. Regal have indicated that they would like to review options. Therefore we have decided not to proceed with the MoU with Regal,” Shell’s Nov. 23 statement continues.
A Nov. 23 report by the Financial Times quotes the newly appointed Greer as saying: “We have to evaluate this Shell offer and compare it against other funding mechanisms.”
According to the FT, Greer stepped down last summer as deputy chief executive of a company developing Shell’s Sakhalin-2 project in Russia, following unconventional motivational statements made by him in an e-mail to his managers earlier that year.
Greer was appointed to Regal last Thursday after a board meeting, according to Ben Willy of UK-based Buchanan Communications Ltd., which represents Regal with the media. Willy said that the way Shell withdrew from the deal was itself inappropriate.
“Obviously they [Shell] chose to disclose this information to the market. Regal may of course question Shell’s approach, given it was a media commentator and not an agreed press release,” Willy said.
In its own statement of Nov. 26, Regal said it is currently studying other sources of funding to further develop the two Ukrainian fields.
“The company is considering its options for the development and commercialization of its Ukrainian assets. A further announcement will be made in due course.”
Missed opportunities
Under the MoU signed between Regal and Shell, Regal would have received $50 million in cash for the interest in its Jersey-based subsidiary that controls the Mekhediviska-Golotvschinska and Svyrydivske gas and condensate fields located 180 km northeast of Kyiv.
Shell was to additionally spend $360 million on investment, paying for Regal’s planned capital expenditure.
The acquisition was expected to boost the presence of Shell in Ukraine. Despite recent interest from other companies, Shell is the only global hydrocarbon leader with a significant presence in Ukraine.
In 2006, Shell signed an oil and gas exploration agreement with Ukraine’s state-owned Ukrgazvydobuvannya to explore eight licensed areas in the potentially large Dnipro-Donetsk Basin. This summer, the group established a joint venture with Moscow-based Alliance Group to operate 150 Shell-branded petrol retail sites in Ukraine. Shell has also established a domestic natural gas trading company in Ukraine.
Ukraine, itself highly dependent on Russia for fuel imports, is said to have significant reserves of its own. But tapping into the country’s deep gas and oil deposits will require massive amounts of investment.
A controversial past
After their 2002 placement on the AIM, Regal shares rose in value by more than 700 percent in less than two years before plummeting in 2005 on news that its drilling in Greece’s northern Aegean sea had yielded disappointing results.
Regal’s major assets are in Ukraine, but the company also holds prospective exploration licenses in Romania, Egypt and Liberia, as well as an oil field investment in Greece. The company’s shares rose over the summer as market speculation suggested that Shell and another company were eying its Mekhediviska-Golotvschinska and Svyrydivskega fields.
On news that Shell was pulling out of the deal, Regal’s shares fell more than 14 percent on Nov. 23.
Regal’s Ukrainian assets have been the center of disputes for over two years.
In 2004, Regal decided to develop its Ukrainian gas exploration on its own, prompting a court battle with Chernihivnaftogazgeologia (CNGG), a Ukrainian government agency that had been Regal’s joint venture partner.
After CNGG won several court victories against Regal, causing its licenses to be invalidated and its share prices to drop, Regal hired a Ukrainian consultant named Dmytro Gelfendbeyn. In return for $50 million or 15 percent of Regal’s stocks, Gelfendbeyn was to get the court case settled in Regal’s favor.
When Ukraine’s Supreme Court ruled in favor of Regal last December, Gelfendbeyn’s British Virgin Island-registered company Alberry Limited, which is rumored to be largely owned by CNGG and another state company, was given a stake in Regal.
According to Buchanan Communications’ Willy, Alberry Ltd. currently has almost 10 percent of ordinary share capital in Regal.
In 2005, Regal owners were informed that a previously unknown Hong Kong-based company called Peak Resources had an option to buy Regal assets.
The option agreement with Peak, which had been agreed upon by Regal’s former Executive Chairman Frank Timis without the board’s knowledge, was settled a year later.
Romanian-born Timis, Regal’s founder, is an energy tycoon who received two convictions for possessing heroin in Australia in the 90s, according to a Regal prospectus.
According to Buchanan Communications’ Willy, Frank Timis was replaced as Regal’s CEO in May 2005.
“He stepped down after the Greed debacle,” Willy said.
The Nov. 23 FT report said that Regal’s new CEO and chairman, David Greer, had been heading another energy company owned by Timis before his appointment to Regal, adding that other Regal shareholders, in addition to Timis, had wanted Greer to join the company.
In addition to Timis and Gelfendbeyn, the rest of Regal’s stock is “in the hand of institutions like Merrill Lynch, Hendersons, Artemis, Landsdowne,” Willy said.
