SIGNS that oil and gas markets are on the road to a recovery of sorts may be welcome in the hard-pressed North Sea industry but developments on the mergers and acquisitions front suggest the outlook for the area is pretty grim.
After industry leaders warned the North Sea was at breaking point in April, when prices turned negative in the US amid the fallout from the coronavirus crisis, the market has rallied in recent weeks.
READ MORE: Oil price hits three month high in boost for hard-pressed North Sea industry
Brent crude has risen from an 18- year low of $15.98 per barrel to more than $40/bbl thanks to moves by major exporters to support the market and the easing of lockdown measures in some countries.
The decision by Opec+ members at the weekend to extend the record production curbs they agreed in April by a month encouraged hopes they would ensure some sort of stability on the pricing front.
However, market watchers have noted the risks posed by the possibility of a second spike in coronavirus infections and Opec+ members failing to keep their promises. The rise in crude prices since April could encourage shale producers in the US to restart fields they have shut in.
Bearing in mind that Brent sold for around $70/bbl in January the outlook for investment in the North Sea may not have changed much.
Experts at the University of Aberdeen recently predicted that even at $45/bbl investment would fall sharply in coming years.
READ MORE: Experts warn North Sea spending set to fall by £10bn a year
Recent deal activity has sent a clear signal that majors are keen to accelerate a retreat from parts of the North Sea that has been underway for some time.
BP and Shell sold off assets in the downturn triggered by the crude price plunge from 2014 to 2016. US heavyweights such as Chevron shifted investment to shale fields in their home country.
Last week BP agreed to accept significant changes to a deal it had agreed in January to sell stakes in two big North Sea developments to Premier Oil.
BP was originally meant to get $625m cash on completion.
It has now agreed to accept $210m on completion with up to a further $115m to come in future depending on what happens to oil prices.
Premier’s share of the potential decommissioning liabilities has been cut to $240m from $600m.
READ MORE: Shares soar in North Sea oil giant after it strikes fresh deal
Investors in Premier seemed delighted by the changes, news of which sent shares in the firm surging.
Hedge fund ARCM, which argued that Premier was set to overpay for the assets and went to court to try to block the original deal, dropped its opposition to the expansion move.
The changes signalled that BP was so keen to reduce its exposure to what are seen as mature North Sea fields that it was prepared to give lots of ground to get a deal done.
BP and Shell made clear during the last downturn that they wanted to focus what investment they made in the North Sea on a narrower range of bumper fields including new developments West of Shetland.
The companies can achieve higher margins on the barrels these produce without having to pay as much as they do to run ageing fields.
Premier achieved its success within a month of Norwegian private equity firm HiTec vision renegotiating the terms of a deal to buy a portfolio of mature North Sea assets from Total.
When the deal was agreed last year the portfolio had a £500m price tag.
HiTec Vision did not provide details of the changes but indicated it was satisfied with them, noting they reflected significant market volatility.
Soon after showing flexibility to help it offload North Sea oil and gas assets Total struck a deal to acquire a majority stake in a project to build the biggest windfarm offshore Scotland.
It agreed to pay SSE up to £130m for the 51% holding in the Seagreen windfarm, which will require total investment of around £3bn.
The windfarm off the Angus coast is expected to generate enough power to meet the energy needs of a million homes.
Total chief executive Patrick Pouyanné said the move represented a major change of scale for the firm’s offshore wind activity in line with a strategy of profitable growth in renewables and low-carbon electricity.
In the announcement of the investment Total gave a big clue about why it might want to shift investment from mature fields in the North Sea to windfarms.
The profits Total makes on oil and gas production will be dependent on conditions in markets that may remain volatile for years.
By contrast, it noted that Seagreen would benefit from 15-year support under the official Contract for Difference (CFD) programme. Total has also negotiated a CFD deal with SSE.
“Both contracts contribute to securing project revenues,” observed Total.
Some may hope Seagreen will generate valuable work for the North Sea supply chain. However, the 114 turbines it will feature will be made on the Isle of Wight by Denmark’s MHI Vestas.
BP and Total may have been more prepared to play hardball in negotiations if they were confident of finding other buyers. But few firms may have been both willing and able to buy the kind of portfolios they were selling even in benign market conditions.
READ MORE: Glasgow-born oil executive to take charge of BP's North Sea business
Premier was one of a small band of firms that found the last downturn created opportunities to expand by acquiring North Sea assets at knockdown prices.
Serica Energy and RockRose Energy made similar moves.
All would be expected to drive hard bargains with any firms that want to sell them North Sea assets today.
If they can acquire assets cheaply enough buyers could help to stimulate much-needed activity on the field development front.
Independents will probably look at the Spirit Energy business which Centrica wants to offload.
This has stakes in West of Shetland acreage that Hurricane Energy has stoked interest in. However, Hurricane has suffered setbacks amid the crude price plunge and announced on Monday that it was parting company with chief executive Robert Trice.
READ MORE: Chief executive quits at pioneering Shetland oil firm as hopes of boom in area fade
There are some packages on the market that are likely to be too big for most independents to go for.
These are thought to include the portfolios amassed by US giant Exxon Mobil and Siccar Point Energy.
Private equity houses that backed expansion by the likes of Siccar Point in the last downturn may want to focus on realising some of their investments rather than raising the stakes in the North Sea.
Israeli-owned Ithaca Energy showed it had big ambitions by acquiring a $2bn portolfio from Chevron last year. It may be too busy digesting that to think about making more big moves for a while.
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