Cautious optimism in 2018 as North Sea assets change hands, says expert

Out-Law Analysis | 10 Jan 2018 | 11:46 am | 2 min. read

ANALYSIS: There has been something of a 'changing of the guard' in the North Sea over the past 12 months, as a wave of mergers and acquisitions brought on board new entrants to the UK Continental Shelf (UKCS).

There is a cautious optimism that, as the 'old guard' redefine where to deploy global resources over the next decade and more, there is a new generation of owners ready to take their place who will inject fresh thinking and renewed impetus to maximise recovery and returns from an ageing basin. It is said that the best place to find and extract hydrocarbons is often the place they have been found already.

In 2017, some of the major operators loosened control while others sharpened their focus on core areas for investment. Shell's $3.8 billion disposal of a package of North Sea assets to Chrysaor was the largest of the 'exploration and production' (E&P) deals over the course of a year which also saw a significant increase in infrastructure changing hands. EnQuest acquired an interest in the Sullom Voe terminal from BP, Ancala Partners took on Apache Corporation's SAFE pipeline interest and INEOS, owner of the Grangemouth oil refinery, expanded its portfolio with the purchase of the Forties pipeline system.

Looking ahead to 2018, we have to hope that optimism filters down to the supply chain, which continues to face tough trading conditions. Last year, these resulted in a number of notable mergers or acquisitions, including GE's buyout of Baker Hughes and Wood Group's takeover of Amec Foster Wheeler. Working capital constraints, lower than anticipated levels of activity and business models based on an anticipated higher oil price make for extremely challenging conditions not conducive to encouraging the investment needed to foster the talent and create the genuine innovative solutions that the industry now demands.

On a positive note, the UK government showed some welcome pragmatism when it announced that it would relax regulations around the transferable tax history of assets in the autumn Budget. Investors should be encouraged that they will have access to historical tax reliefs, and this will encourage additional M&A activity from November 2018 onwards. It seems that the government has at last been listening, largely down to the good work of industry lobbyists – Oil and Gas UK in particular.

It is also encouraging that progress continues on the vexed question of decommissioning. It seems that the tone of the conversation has altered, and despite the harsh economic realities of the oil price downturn there is more willingness to discuss how this billion-pound industry can evolve to suit all involved.

While there has been progress on how to deal with conventional hydrocarbons, confusion remains around the proposed development of the UK's onshore asset base. There has been careful progress on supporting the emerging shale gas industry in England and Wales, but north of the border the Scottish government confirmed its moratorium on planning applications for the extraction of unconventional hydrocarbons. As the UK prepares to exit the EU, we need to maximise our natural resources while being aware of climate change and environmental issues.

Globally, renewed tension in the Middle East and a US president focused on putting 'America first' inevitably puts pressure on global energy markets. Traditionally, many countries have relied on the USA to bring some balance to complex and volatile situations but that is no longer guaranteed, and 2018 promises more twists and turns which will shape the UK's energy policy.

Bob Ruddiman is an energy law expert at Pinsent Masons, the law firm behind