'Flurry' of billion dollar deals signals start of 'third wave' of North Sea activity, says expert

Out-Law News | 15 Feb 2017 | 9:56 am | 2 min. read

Chrysaor's recent $3.8 billion acquisition of North Sea oil and gas assets from Shell will be the "catalyst" for a new wave of mergers and acquisitions in the UK Continental Shelf (UKCS), according to an expert at Pinsent Masons, the law firm behind Out-Law.com.

Energy deals expert Rosalie Chadwick described the deal as the likely "tipping point" leading to a "third wave of the North Sea's evolution and a number of other significant transactions in the months and years ahead".

"More availability of funding, a stable oil price, better alignment of price expectations for both buyers and sellers, and a fresh approach to decommissioning responsibilities means that all the chess pieces are lined up with the North Sea poised for a period of productive M&A activity," she said.

"The identity of a lot of owners will change quite considerably, but it is no bad thing to see well-capitalised new blood enter the sector and embracing new technologies, which make smaller recoveries in the more mature fields economically viable," she said.

Over $6bn has been invested in North Sea assets in the last six months as a result of renewed interest in exploration and production activity, including the $1.24bn acquisition last week of Ithaca Energy by Israel-based Delek Group. Pinsent Masons provided legal advice to Ithaca on the deal, which Chadwick said "caps off a busy start to the year which has seen a renewed level of interest in North Sea assets as prices have stabilised and expectations adjusted".

The private equity markets had provided an increasing source of finance for deals over the past six to 12 months, not just in funding management terms but also in capital deployment, Chadwick said. Innovative deal structures including the likes of Blackstone and Bluewater Energy's investment of over $500 million into Siccar Point Energy, Suncor Energy's acquisition of a 30% stake in the Rosebank project and EnQuest's £85m purchase of a stake in BP's Magnus field also pointed to the recovery of North Sea investment, she said.

"This has been transformational after a four-year funding hiatus which left the North Sea perched on the edge of a chasm," she said.

Chadwick said that the surge in activity could be attributed to businesses both successfully adjusting to the 'new normal' oil price of $50 per barrel following the steep decline in commodity prices, and taking a "more realistic" view of assets due for decommissioning. Shell, for example, has agreed to cover around $1bn worth of Chrysaor's future decommissioning costs as part of their deal; while Chrysaor noted the reduction in North Sea operating costs to "competitive economic levels" as part of its announcement to the industry.

"This funding boom is a combination of businesses successfully adjusting to the new $50 oil norm and resetting their cost base which has resulted in a surge of confidence in investment in North Sea assets," Chadwick said.

"We're also experiencing a transformation in terms of the treatment of decommissioning as assets change hands. Majors are taking a more realistic view, with recognition that some liabilities will need to be retained and the net result of this shift in attitude is that more deals will get over the line," she said.

The average cost of extracting a barrel of oil or gas fell by 45% during 2015, according to the latest figures from industry body Oil and Gas UK.