Posted By SERRAI INVEST CAPITAL Ltd ( Energy Department)
North Sea set to roll out the barrels again as UK oil industry is thrown an unlikely lifeline
After a vicious two-year oil collapse that brought the Granite City to its knees, Britain’s oil and gas industry is daring to hope again.
In Aberdeen people are being embarrassingly weeks after steering oil minnow Chrysoar through an audacious multi-billion pound deal to become one of the largest independent operators in the North Sea at a stroke.
People want to hear someone talk up what might be achievable. What they need now as an industry is to show what the future could look like and give people something to focus on and look forward to – some sense of optimism after a particularly difficult year for the workforce,”after the entire BREXIT.
Global oil prices have dragged through a price rout longer and deeper than the North Sea workforce can remember.
Since the historic lows early last year, the oil and gas industry has lost a quarter of its staff and its capital city of Aberdeen has shrunk by almost a fifth, leaving a trail of insolvencies and mortgage arrears in its wake.
Major oil-producing regions across the globe have been battered as project plans were were left in tatters and booming profits turned to loss.
In the North Sea, fears that the oil basin might not survive a late-life market shock have added extra weight to the gloom.
These fears have been grossly overplayed,
The $100-a-barrel boom years may have left producers bloated with unnecessary costs and rising debt, but the need for leaner operations in the “super-mature” North Sea was becoming clear even before the market crash.
Oil production costs have slipped from $35 a barrel to the low $20s and are expected to fall further still. Government has slashed taxes and smoothed the tax rules for dismantling projects in the coming years. A new regulator is stepping in to streamline a new vision for the industry.
It has been an unprecedented collaboration that has protected the North Sea from collapse and lay the foundation for a new chapter.
“The story around the demise of the North Sea has been overplayed. When you speak to global money, there are still questions: ‘Isn’t it over, isn’t it high cost?’. But investors are now on the cusp of understanding that this basin is not over and it’s not high cost any more.
It’s beginning to dawn on people that there is opportunity to invest and make great returns – which for the past few years has been completely off the agenda,”
Already the green shoots are beginning to show. Oil and Gas UK’s latest economic report shows over £100m of investment in the North Sea last year, helping the basin buck its 15-year trend of declining oil production with an increase of 10%. Rising oil is expected to continue into 2017 with a swathe of start-ups expected later in the year and an estimated 20 billion barrels of oil still to be produced in the lifetime of the UK continental shelf.
Chrysoar is poised to step into the shoes of Royal Dutch Shell after agreeing to buy a mix of the oil major’s older fields, new developments and infrastructure. The £3bn ($2.4bn) deal is supported by its private equity backers and promises to lead the North Sea industry from the gloom of a difficult downturn.
The emerging super-player is not alone. A rising legion of oilmen is preparing to take the baton from legacy oil majors to create a new paradigm for the North Sea basin, in a gradual changing of the guard which should secure the future of Britain’s oil and gas industry for decades.
North Sea deals are firmly back on the agenda; their value is counted in the billions and the lifespan of the projects in decades.
Total’s Elgin PUQ platform (right) and the Rowan Gorilla V drilling rig in the North SeaCredit: AFP/Getty Images
Chrysoar’s private equity backers EIG Partners are among a handful of financiers moving in on promising oil projects, put on the block by oil majors looking to trim their portfolios down. Blackrock-backed Siccar Point snapped up £1bn worth of North Sea assets from Austria’s OMV. Behind closed doors, Neptune is understood to be deep in talks with French energy giant Engie over a deal backed by private equity firms Carlyle Group and CVC Capital Partners which could be larger than the two deals combined.
Future deals could emerge from a flurry of as yet unnamed management teams hunting for deals in the hope of securing their own backers.
But why would private equity back oil minnows to succeed where the likes of Shell, OMV and Engie fear to tread?
Tony Durrant, chief executive of Premier Oil, says the incentive for all players is for the right asset to be in the hands of the right producer. And the right hands for the North Sea’s most promising fields are those of the smaller, nimble players.
As the North Sea becomes more mature, there will be fewer and fewer large investments but still many small and incremental projects. Those investments are not material and are not getting to the top of the priority list for the majors because they wouldn’t get noticed in a bigger company, so they’re not willing to put in the work,.
For oil behemoths with monster balance sheets, it makes more sense to focus on projects that fit their scale rather than chase smaller opportunities with the cumbersome process structures of a multi-national.
Premier Oil chief executive Tony Durrant says: “I’ve just sat through a project review meeting this morning on our project at Tormount and the conclusion we came to at the end of the meeting is what we’re go with. The nature of the animal at a major would require multiple layers before reaching that kind of decision,”
If I were being a little harsh on the majors, I would say that because of the size of the businesses, the way that they manage them gets in the way. For example, it’s rare that the country unit controls the budget, which makes it very difficult to run,”
Although oil majors are pulling back from the North Sea, it is far from a full retreat. BP and Shell have both spearheaded cost-cutting drives in a relatively untapped area of the North Sea west of the Shetland Islands, which is set to host a major resurgence as interest in older fields in the south of the North Sea basin dwindles.
The opportunity for innovative deals with small players is emerging here, too.
Independent oil producer Enquest emerged from a radical financial restructuring to rescue the debt-hit firm from burning through its cash reserves to take over one of BP’s North Sea oilfields.
The £2.5bn restructuring underlines the support banks have shown struggling explorers – and their vote of confidence in Enquest has proved well founded.
The deal bolsters Enquest’s volumes by a third by handing the firm a 25pc stake in BP’s Magnus field and full responsibility for operating the project. And in a pleasing development for its lenders Enquest will be spared from stumping up $85m (£68m) in cash by funding the deal through future cashflow from its share of the project.
It’s a deal that points to the opportunities which are there for the taking for North Sea players. The deal allows BP to keep hold of revenue flows from high-quality projects in a promising corner of the North Sea without the burden of managing an incremental field.
Following the deal, BP’s North Sea boss Mark Thomas said: “In recent years, we have been focusing our North Sea portfolio around core assets west of Shetland and in the central North Sea – bringing new fields into production, redeveloping and renewing existing producing facilities, acquiring new acreage and interests through licence rounds and farm-ins, and selling some of our mature assets to those who see greater strategic fit with their businesses.”
It’s an ownership structure Enquest’s chief executive Amjad Bseisu would be happy to be a part of again and expects to see replicated.
“We’re not closed for business and we’ll continue to look for opportunities. There will continuously be new deals discussed and and assets changing hands – that will continue. The hope is that the industry will have a different future and a different face with the new players at are coming up,”
Durrant says the emergence of a new North Sea elite is vital to drive plans to improve North Sea further through collaboration on technological advances and infrastructure sharing.
More players means more collaboration. We have a bit of a head start and we’ve got a big tax loss position which has brought a regular flow of private equity funds to our door to discuss joint ventures and alliances – but these are quite complex deals to do. It absolutely needs to be the right fit,
We think, it’s time for the North Sea to overcome its crisis of confidence.
“We think also the UKCS has come a long way over the last two years and massively improved cost and efficiency more than I’ve ever known.
“Britain has this world-class industrial heritage, but we’ve talked ourselves down for too long. It’s important to give people, and particularly young people considering a role in the North Sea, a clearer picture of what’s possible.”
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