AS oil and gas firms warn of an impending crisis in the North Sea deal activity shows that deep-pocketed investors still see opportunities to generate bumper returns in the area.
The recent hike in the windfall tax combined with the effect of a fall in oil and gas prices has led industry leaders to sound the alarm about the prospects for a sector they reckon has fallen victim to populist moves by a Government that is fighting for survival.
They have complained that the decision to introduce the Energy Profit Levy in May and then increase the relevant rate in November has left firms facing a massive increase in taxes just as revenues are set to come under pressure.
READ MORE: North Sea big gun's windfall tax bluster may backfire
The tax was introduced in response to the surge in oil and gas prices that followed the launch of Russia’s full scale invasion of Ukraine in February last year. The rises left consumers facing steep increases in their bills.
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However, prices have fallen sharply in recent months following a mild winter.
Against that backdrop, sector champions say that while the Government wants to encourage firms to increase North Sea output to reduce the UK’s reliance on imports its actions may have the opposite effect.
The latest analysis of the state of the North Sea market by industry body OEUK (Offshore Energies UK) paints a gloomy picture.
The Business Outlook report published by OEUK today says nine out of 10 of North Sea operators are cutting back investment, citing the effect of high taxes, political uncertainty and inflation.
David Whitehouse, OEUK’s chief executive, complains: “The total tax rate for offshore oil and gas operators is now 75% - three times that of conventional UK business.”
However, the impact of the tax on production revenues will be offset by the generous allowance the Government introduced in respect of investment in North Sea exploration and development work.
After intensive lobbying by OEUK and others the Government is expected to offer the industry a big concession this week by saying the windfall tax will not apply if oil and gas prices fall below a specified ‘normal’ level, whatever that means.
READ MORE: Shetland megafields in focus for oil giants amid North Sea exodus fears
But amid the row about the tax an oil trading group run by an entrepreneur who has kept a low profile has made a bold move that suggests some think now is a good time to invest in the North Sea.
Surrey-based Prax Group this month agreed to acquire West of Shetland-focused Hurricane Energy in a deal that values the firm at £250 million.
The deal follows a dramatic improvement in the fortunes of Hurricane, which came close to collapse amid the slump in the industry triggered by the pandemic.
Hurricane generated excitement after making finds in an under-explored area West of Shetland.
The company started production from the Lancaster find in 2019 but saw its shares plunge following well setbacks, which magnified the effect of the fall in oil prices seen during the pandemic in 2020.
After the company cut estimates of the size of its finds, creditors looked set to take control of Hurricane until a High Court judge blocked the restructuring plan concerned in June 2021.
READ MORE: Oil exploration pioneer eyes North Sea acquisitions after year of 'profound change'
Following the rise in oil and gas prices fuelled by the recovery from the Covid-19 crisis and war in Ukraine, Hurricane is generating significant amounts of cash.
Brent crude sold for around $75 per barrel yesterday. That may be well below the $130/bbl it fetched in March last year but is still high by historic standards. Gas prices are well above the long-term average.
In the announcement of the Hurricane deal Prax said it saw great strategic value in its target.
The acquisition allows Prax to expand into the upstream business of oil and gas production after focusing on other parts of the value chain.
Founded in 1999 by Sanjeev Kumar Sousaipillai, Prax is a successful player in the global oil trading business. The business has developed significant refining and petrol retail operations through acquisitions, with support from the former Clydesdale Bank.
It appears to have decided that the time is now right to go large in the North Sea.
“We see great strategic value in being a fully integrated energy company” said Mr Kumar of the Hurricane deal. He noted that Prax had recruited experienced upstream and M&A specialists to lead its expansion drive.
The team includes Iain McKendrick, who used to run North Sea heavyweight Ithaca Energy, which hopes to develop the huge Cambo find off Shetland.
Prax negotiated the Hurricane deal while the windfall tax debate became increasingly heated.
It has made clear the acquisition starts a process that is likely to include other North Sea deals.
Head of exploration and production Alessandro Agostini said Prax would complete further acquisitions at pace, noting: “Hurricane is the first step and the platform from which our upstream division will be built, as … we review the potential acquisition of further, complementary UK continental shelf upstream assets."
Significantly, Prax said it expects to be able to use Hurricane’s tax losses to make “tax-advantaged” production acquisitions.
This sort of talk provides a further indication that rather than seeing a big fall in North Sea activity we could be set for a repeat of the kind of changing of the guard that was seen in the last downturn.
The plunge in prices from 2014 ended a long boom and encouraged some giants to retreat from the area.
However, others decided the downturn created attractive opportunities to buy North Sea assets which they expected would allow them to capitalise on favourable demand trends.
Groups that entered the North Sea during the downturn included an oil and gas trading business developed by Italian entrepreneur Francesco Mazzagatti.
READ MORE: £250m takeover provides major vote of confidence for North Sea amid coronavirus crisis
In July 2020 Mr Mazzagatti’s Viaro group agreed a £248m deal to buy the North Sea business that RockRose Energy had developed through acquisitions in the preceding five years.
In December 2020 Viaro bought energy giant SSE’s North Sea portfolio for £120m. This included a stake in the giant Laggan gas field, which is in production West of Shetland
There is no sign that recent developments have dented Viaro’s enthusiasm for the North Sea.
Only this month Viaro agreed to buy West of Shetland-focused Spark Exploration in a deal that it said proved its commitment to the North Sea basin and the UK’s energy security drive.
Viaro said the Spark deal would pave the way for it to invest more than £200m in developing the 90 million barrel Tuck prospect.
As Viaro expects Tuck to be onstream by 2028, the company clearly does not expect the last year's tax changes to make such projects uneconomic.
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