Investors still feel the lure of North Sea
Two major M&A deals and a boost from the Autumn 2017 budget may breathe new life into the UKCS
Fresh tax breaks for asset transfers in the UK North Sea are designed to maintain momentum in a fast-maturing oil province, where recent acreage sales have demonstrated there is still investor appetite—at the right price.
Philip Hammond, the UK's Chancellor of the Exchequer, announced a tax break linked to transfers of North Sea oil-and-gasfields as part of his Autumn budget statement outlining government spending plans for the coming year.
From November 2018, the tax history for oil-and-gasfields in the North Sea will be transferable from the seller to the buyer, which may mean that those operating assets at the end of their lives would be entitled to higher tax relief for decommissioning those assets. The measure was mooted by Hammond in April and was subject to a round of consultations with the industry prior to the announcement.
At present, UK taxpayers, via existing government relief, cover around 40% of decommissioning costs. Estimates for the total decommissioning bill for UK offshore vary—the Oil and Gas Authority produced a report earlier this year with a worst-case estimate of over £80bn ($106.24bn).
Hammond referred to the new measure as "an innovative tax policy that will encourage new entrants to bring fresh investment to a basin that still holds up to 20bn barrels of oil".
Chris Bates, a tax consultant at law firm Norton Rose Fulbright, said he was optimistic that the measure represented a "pragmatic solution" that would "give a real boost to the policy of maximising economic recovery in the North Sea basin". He said it "should alleviate the current bottleneck around the transfer of mature fields in the North Sea to late life specialists".
However, Alex Tostevin, a tax partner at law firm Dentons, struck a cautious note. "Quite how useful this will be, will be down to the detail of the legislation," Tostevin said. "To the extent that any person taking over a field from another person who has no positive tax-paying history—which is the case for many North Sea operators—the effect of this may be marginal."
The hope is that such incentives will encourage more deals similar to recent ones between BP and Serica Energy, and Siccar Point Energy and Ineos.
BP's sale of stakes in three fields in its Bruce development in the North Sea to Serica Energy represents the new face of North Sea deal-making between a supermajor keen to offload a maturing non-core asset to a minnow with limited resources eager to make its mark.
Serica is acquiring all but 1% of BP's 37% interest in the Bruce field, BP's 34.84% interest in the Keith field and its 50% stake in the Rhum field.
While the deal is likely to see some £300m paid to BP over the next four years, Serica only needs to find £12.8m upfront. The rest will come from a share of cash flows over the next four years and a payment equivalent to 30% of BP's post-tax decommissioning costs, along with further payments contingent on future asset performance and oil and gas prices. BP continues to carry financial liability for decommissioning the fields, although decommissioning would be executed by Serica.
More details of the agreement's structure are due to emerge in the coming days, but it is clear the deal has pushed Serica into a much higher profile role in the North Sea. The company said that, based on first half 2017 output rates, its net production would increase approximately seven-fold to over 21,000 barrels of oil equivalent a day, of which over 85% would be gas.
Ineos' acquisition of controlling stakes in two licenses from Siccar is a deal cut from somewhat different cloth. It reflects Ineos' strategy, which owns the Grangemouth petrochemicals facility near Edinburgh, to consolidate its move into upstream. This follows its acquisition of North Assets from Denmark's Dong Energy - now called Orsted—earlier this year.
Siccar has agreed to sell majority stakes in exploration licenses P.1854 and P.1935, 90 miles north of Shetland, giving Ineos 66.6% interests in both. Siccar, an entity backed by finance house Blackstone, bought the assets from OMV in January. Ineos said one prospect on this acreage, known as Lyon, could contain of 1-3 trillion cubic feet of recoverable gas, which could be large enough to form a new gas-hub development similar to that based on the Laggan-Tormore fields, which serves a gas processing plant in Shetland.
The acquisition strengthens Ineos' position in the UK energy sector generally and shows the determination of its chairman Jim Ratcliffe to pick up North Sea assets, while prices remain relatively low.
These two deals follow on from two other significant transactions earlier in the year in which private equity firms Chrysaor and Neptune bought North Sea assets from Shell and Engie, respectively.
Another barometer of interest in the hydrocarbons province is the response to the UK's 30th Offshore Licensing Round, which the Oil & Gas Authority has announced produced 96 applications from 68 companies covering 239 blocks. The licensing round, which closed on 21 November, included acreage in the southern, central and northern North Sea, the West of Shetland area and East Irish Sea. In total some 114,426 square km was on offer.
Nick Richardson, head of exploration and new ventures at the OGA, said the outcome was positive. "Despite the difficult economic environment, industry has responded strongly to this round, confirming the high remaining potential of the UKCS [UK continental shelf]," he said.