North Sea asset sale wave is no cure-all
A wave of asset sales in the North Sea by major oil companies and their less-noticed Japanese partners is raising hopes for a reboot of the UK and Norwegian sectors by mostly private operating companies, but will not be a cure-all, critics say.
The major companies that built the North Sea industry in the 1960s and ’70s, particularly US corporations, have for several years been selling assets to smaller, dedicated companies, often backed by private equity. These are seen as better able to overcome inefficiencies, eke out production, and hunt down overlooked resources.
Industry group Oil & Gas UK says asset deals just over the last 18 months could boost oil and gas output by 125 million barrels of oil equivalent, one of the biggest being Shell’s $3 billion sale of assets to private equity-backed Chrysaor last year.
The deal-making continues: Total said last month it aimed to sell UK assets with production capacity of 40,000 boe/d as it focuses on its West of Shetland gas hub and the new Glendronach discovery. Chevron is also trying to sell assets and this month said it would sell its operating stake in the UK Rosebank project west of the Shetland Islands to Norway’s state-controlled Equinor; the latter has been vague on its Rosebank plans, saying it will “take some time for a detailed assessment.”
Such deals may conform with an industry mantra of getting “the right assets in the right hands,” but not everyone thinks the industry’s problems have been solved.
Less noticed has been an exodus of Japanese corporations, some of them among the world’s largest companies, which for decades invested alongside oil and gas majors, welcomed particularly as a cheap source of capital.
A source familiar with their thinking said Japan Inc had lost patience with the North Sea, particularly with delays and cost over-runs that are gradually being overcome, but remain an issue. The stand-out example is BP’s Clair Ridge project, approved in 2011 and now more than two years overdue.
Production efficiency — meaning actual production versus potential production — recovered to 74% last year from 60% in 2012, according to Oil & Gas UK. But that has been “too little, too late” for Japanese corporations, the source said.
Last month, Itochu announced the sale of its UK oil and gas arm, Cieco, including a stake in the Western Isles field, to Aberdeen-based Verus Petroleum, and Mitsui said it would sell its Britannia field stake to Zennor Petroleum. Since 2016 Idemitsu has sold stakes in 10 UK fields to independent RockRose Energy, and JX Nippon has sold stakes in the large Culzean and Mariner projects, as well as the Blane field.
“Japan effectively made its decision about the North Sea about three years ago. They would say the operations in the North Sea aren’t at all efficient. Largely those criticisms were right. In many ways they’re still even right now,” the source said.
The North Sea’s defenders, including oil majors such as BP that maintain a presence, argue that efficiency has improved, helped by the creation of new regulator the Oil & Gas Authority.
Faroe Petroleum CEO Graham Stewart described the new investments as a “shot in the arm” in both Norway and the UK, and praised the decision of Italy’s Eni’s to merge its Norwegian business into a venture with private equity-backed Point Resources, a move that followed bruising criticism of Eni from Norway’s offshore safety regulator. BP has taken a similar approach with the creation of Aker BP.
UK TAX CLOUD
Stewart worries, however, about UK tax instability, following a big tax hike in 2011 that was gradually reversed over 2015-16. He said lack of faith in the UK tax regime had contributed to “pitifully low” levels of UK exploration, needed to sustain output in the long term. Oil & Gas UK expects exploration drilling to plunge to levels not seen since 1965 this year, with just 10-12 wells drilled.
Some analysts argue it is not the amount of exploration that is important, but its quality, among them David Moseley, manager at consultancy Westwood Global Energy, who says success rates have improved and explorers, including the majors, are testing new geological concepts.
But Faroe’s Stewart says the incentives needed have not been put in place in the UK. “The source of future revenues in the UK is exploration,” Stewart said. “We’ve chosen to invest heavily in Norway because of many things, but its fiscal stability is one of those things. The UK and its instability from a fiscal perspective is a massive detractor and will be for others.”
Stewart is not alone in doubting the thoroughness of the North Sea’s transformation; he also thinks Equinor is guilty of hanging on too long to mature assets that would be better managed by others, saying the state company “has so many fields and they’re not all equally important and they won’t all get equal attention, whereas the value in those fields could be unlocked.”
On the operations front, BP’s handover of the Sullom Voe oil terminal, loading point for Brent and Clair crude, has prompted concern among some of the terminal’s users that the buyer, heavily indebted EnQuest, may not be sufficiently robust. EnQuest, which was bailed out by family and friends of CEO Amjad Bseisu in 2016, says it expects to cut Sullom Voe’s running costs by 25% this year thanks to efficiencies.
Jon Clark, partner at Ernst & Young Transaction Advisory Services, says generally there are too many small companies in the North Sea, some of them reliant on just a few assets and on high oil prices. Exceptions include Chrysaor and Neptune Energy, a company backed by US private equity and a Chinese sovereign wealth fund that in barely a year bought the upstream arms of France’s Engie and Germany’s VNG.
Clark sees a need for consolidation, and predicts efforts by private equity backers to recoup their investments through partial stock market flotations. “Scale for a business like Chrysaor drives efficiency. Aggregation and scale is going to drive value,” Clark said. “You’re probably going to see some consolidation.”