Royal Dutch Shell PLC (RDSB) has agreed to sell its most prolific oil block in Nigeria to Shoreline Natural Resources Ltd., a local entity backed by U.K. explorer Heritage Oil PLC (HOIL.LN), for $850 million.

Shoreline, 45%-owned by Heritage, will buy a stake in Block OML 30 currently owned by Shell, France's Total SA (TOT) and Italy's Eni SpA (E); the national oil company of Nigeria, Africa's top crude producer, will retain its 55% interest in the block.

The OML 30 block, which produces around 35,000 barrels a day, had been valued at $1 billion in earlier stages of the sale process, a person close to the deal had said.

Shell has in recent years sought to reduce its number of onshore oil fields in Nigeria , selling off several blocks to local investors. Instead, the Anglo-Dutch oil giant's Nigerian venture is refocusing its efforts offshore, where rigs are better insulated from oil theft, militancy, and the legal constraints of operating in an area that is vulnerable both environmentally and economically.

Heritage Chief Executive Tony Buckingham hailed what he described a "transformational" acquisition for the mid-tier oil and gas company, saying it would provide "a material change in production and reserves."

Taking control of OML 30 will allow Shoreline--and Heritage--to leapfrog into the ranks of the country's top producers. The block is believed to hold 707 million barrels in reserves, putting it in the same league as lesser regional producers Ghana or Equatorial Guinea .

But Singer Capital Markets analyst Simon Hawkins cautioned of risks involved in operation in what he called "one of the world's most challenging environments."

In a note to investors Mr. Hawkins, a former employee of Shell's Nigeria unit SPDC, pointed out that one of the frustrations that Shell had operating the assets was a "crippling backlog of cash calls" from the Nigerian National Petroleum Corp., which remains a 55% owner and funder of OML 30.

"Being dependent on another indigenous Nigerian partner [Shoreline] could potentially compound these funding problems," Mr. Hawkins said.

Furthermore, he warned: "Operations across SPDC's asset base have been plagued by community issues and industrial scale theft of crude oil which the company will have to work hard to address."

Mr. Hawkins also noted that the headline numbers of $850 million and reserves of 707 million barrels, "imply the JV is paying between $1.7-2.7 a barrel, which is on the low end of what we understand assets have recently been bid for in Nigeria ."

Singer has a "fair value" rating on the Heritage stock, with a 130 pence target price.

Heritage plans to fund the deal though a $550 million bridge finance loan from Standard Bank Group Ltd. (SBK.JO) and a subsequent $370 million rights issue. Because the proposed transaction is classified as a reverse takeover under stock exchange rules, Heritage will have to seek shareholder approval for the deal.

Shell shares were relatively unmoved following news of the deal.

At 1047 GMT Shell B shares were up 12 pence, or 0.5%, at 2,237 pence. As it is classified as a reverse takeover, Heritage's shares were suspended at 123.0 pence, pending publication of a prospectus.

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