M&A in the North Sea: Tipping point or slipping point?

There’s a perfect storm in the North Sea. In the last couple of years the combination of the new ‘lower for longer’ oil price regime, the pressure to move to a lower-carbon economy, rising costs, decommissioning challenges, and declining reserves has completely changed the landscape, both for operators and for investors. There are big risks to manage, but there are also opportunities to be had, and possibly significant ones. Either way, change is coming, because the one thing that’s certain is that the status quo is no longer an option: the North Sea will either have to evolve and seize the opportunities, or risk see the whole basin go into, at best, stagnation, and at worst, inexorable decline. The question now is which way the industry will go.

The new North Sea

At the end of the last century around 80% of licences were held by just 30 operators in the North Sea, with substantially all of them held by oil majors; right now, there are 156 licensees. And this in a basin where oil reserves are depleting. So what’s the explanation? Indeed, much of it lies in the very fact that reserves are depleting. It’s getting harder to extract the oil that remains, and this is opening up opportunities for other companies, whether that’s independents, special-purpose vehicles funded by Private Equity, or “non-oil” corporations.

These operators don’t have the structure and associated cost bases of the oil majors. Perhaps more importantly, they don’t necessarily have the same approach either: they aren’t burdened with the legacy of the past, culturally, operationally, or technologically. Starting with a clean sheet of paper it is easier for them to be nimble and efficient and willing to rip up the rule book; they aren’t wedded to existing processes, and they can take full advantage of advanced new technology, which in turn allows them to more easily operate at lower cost. Let’s remember that many of the industry’s technological innovations originated in the North Sea before being adopted globally. .

There could be as much as 20-30bn boe still available in the North Sea, which makes it an exciting prospect for the right kind of player. Small wonder, then, that we think there could be up to $85bn of money ready to invest (globally), in the right deals, and at the right price. And it’s not just extraction the new operators are interested in: there are possibilities in infrastructure too, and not just pipelines, but telecoms and fibre optics. In fact, we’re seeing the emergence of a whole new breed of ‘midstream’ as the vertical integration of previous decades starts to fragment in the face of the decommissioning challenge.

And there’s the rub. Many of the M&A deals that could be happening right now are being hampered, in the North Sea because of the uncertainty created by decommissioning. With little precedence in the basin, the true cost of decommissioning is difficult to gauge, which makes it difficult to divide up the range of possible liabilities. The tax situation isn’t helping ether, since a new player buying assets has a potential (and serious) tax headache to deal with, as its eventual decommissioning costs will be difficult to monetise.

Seizing the moment

So, in short, the perfect storm could create a perfect opportunity, particularly with oil prices appearing to stabilise around $50 (as this article was being written). The chance to rethink how the North Sea works, and develop new ways of working that could revolutionise not just the North Sea but other basins in a similar situation, like Norway, or the Gulf of Mexico. Likewise there are M&A deals waiting to be done that are just waiting for the right terms and price (and we may have already passed the ‘trough’ oil price, so more of the majors may be willing to sell). But those deals will depend on finding innovative deal structures that share both the future rewards and the undoubted risks. And like the North Sea as a whole, those deals will also demand innovative thinking, a willingness to change, positive leadership and, above all, courage. With 40 plus years’ experience and a strong track record of innovation, the basin is in the strong position of having many of the tools needed to rise to this challenge. The next two years will be make or break though. Watch this space!

 

What do you think the future holds for the North Sea? Share your thoughts below or schedule a meeting to discuss your situation in confidence.

 

Ben Stuart |  Senior Manager, Transaction Services
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Mairi Massey |  Director, Tax
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Neil Leppard |  Director, Transaction Services
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