Bidders for an old North Sea oilfield are being asked to stump up guarantees for decommissioning costs that are more than two thirds of the value of the stake for sale, The Times has learnt.
The US oil company ConocoPhillips is one of a number of oil majors that are exiting mature regions such as the North Sea to focus on higher growth prospects.
In January ConocoPhillips put its North Sea interests up for sale. Its central assets, which includes its 23.4 per cent stake in Alba field, worth about $100 million (£60 million), are understood to be the first to be sold.The field produces about 28,000 barrels per day. In production since 1994, it is nearing the end of its life.
According to the consultancy Wood MacKenzie, the pre-tax cost to decommission the field is $220 million, with ConocoPhillips liable for about $50 million of this.
Oil companies are becoming increasingly nervous, though, that the Government will not honour its promise to allow them to offset some of the cost of retiring their facilities against tax.
Advertisement
Because most of the companies snapping up the majors’ assets are smaller companies, the sellers — and remaining partners in the field — fear that they will be left with the liability if the new owner is unable to meet its share of the cost. As a result of the growing uncertainty, bankers say that many companies selling ageing fields are demanding that buyers provide increasingly onerous letters of credit from a bank or parent company.
In the case of the Alba field, buyers are being told to provide letters of credit worth 135 per cent of ConocoPhillips’ nominal liabilities, or about $70 million.
Letters of credit can demand up to 150 per cent cover. It is not clear whether the bidders for ConocoPhillips’ fields will agree to such harsh terms.
Premier Oil, of Britain, and the Dutch company Oranje-Nassau are among at least three companies to table final bids for stakes in the central North Sea fields.
Deal activity in the North Sea has almost ground to a halt this year, largely because of the uncertainty over decommissioning costs. Alan McCrae, head of UK energy tax at PricewaterhouseCoopers, said: “Companies are increasingly nervous that the Government won’t stand behind its decommissioning liabilities. With many of the major oil companies exiting the North Sea and being replaced by companies with smaller balance sheets, the anxiety of those remaining is exacerbated.”