The oil industry should welcome cash-rich private equity buyers to the North Sea with open arms, a consultancy has claimed.
More than $5 billion of North Sea fields have changed hands already this year in deals backed by private equity cash and, with firms armed with billions more, others are likely to follow, a report by Wood Mackenzie has found.
Oil majors and integrated energy groups are streamlining their global operations to adjust to lower prices and are reducing their spending in British and Norwegian waters.
As such, they are offloading assets to a growing breed of “North Sea mid-caps”, comprising independents and private equity-backed businesses. The industry consultancy said that there had been “a big step-change in scale and interest” from private equity firms.
“International players such as Blackstone, Blue Water, Carlyle Group and EIG have set up North Sea war chests approaching $15 billion,” it said. “Initially, after the oil price crash, there was a gap between what the seller and buyer expected in terms of the price of assets. However, this has aligned in the last year or so.”
Advertisement
In January, Chrysaor, which is backed by EIG, bought much of Shell’s North Sea production in a deal worth at least $3 billion. Neptune, backed by Carlyle Group and CVC Capital Partners, acquired North Sea assets from Engie as part of a $3.9 billion deal for its global oil and gas business in May.
Wood Mackenzie said that only a small fraction of the estimated $15 billion had been used up so far, since companies combined equity with debt financing.
Governments were “understandably wary of losing the expertise and deep pockets of the majors”, but “on balance, the change in the corporate landscape is a good thing”, Wood Mackenzie said. “Investment will increase, production life will be extended and value should be created.”
Fiona Legate, senior analyst at Wood Mackenzie, said that private equity-backed firms had “a mandate to grow in the North Sea”, since their backers wanted to “come in, make their money within a certain time frame” then exit.
They were less bureaucratic and more focused on one region, so were more likely to develop assets that would struggle to compete for funding within an oil major. “Attracting capital in the North Sea within a global portfolio is becoming more difficult,” she said. “The North Sea costs have come down, but it is still a lot more expensive than other regions.”
Advertisement
Both Neptune and Chrysaor have said they are on the lookout for more deals in the basin.
Phil Kirk, chief executive of Chrysaor, said that private equity interest had been driven by “a wall of money looking for a home” as firms sought to diversify away from onshore production in the United States, where competition was fierce. Falling costs and increasing production in the North Sea had made it more attractive.
Oil majors had “an entirely different level of materiality” needed to make an investment compared with companies such as Chrysaor. “Unless the opportunity is in the half-a-billion-dollar range it won’t get to main board of a major. For us, $100 million, $200 million is material and is an opportunity to be focused on and there are opportunities like that in the UK,” he said.
BP confirmed it may offload more smaller, older assets in the North Sea, although it said it remained committed to bigger projects west of Shetland.
Behind the story
Oil consumption in the UK rose in 2016 for the second year running, as low fuel prices helped to buck a long-term trend of declining usage (Emily Gosden writes). Demand for petroleum products increased by 1.5 per cent to 69 million tonnes, government figures show.
Advertisement
This was “the second successive increase following several successive years of falls”, an annual review of energy usage found. “Over 70 per cent of oil is consumed in the transport sector, which showed an increase of 1.9 per cent from 2015. An increase in demand for diesel, combined with reduced contraction in demand for petrol, has driven the overall increase. Demand has probably been affected by low road fuel prices,” it said.
The amount of petroleum products used in car travel rose by 2.4 per cent.
Oil demand for goods vehicles and buses rose by the same percentage, in a trend that may be linked to the growing popularity of home delivery services.
Fuel for air travel grew by 0.9 per cent, while there was a 6.6 per cent increase in oil used in non-energy applications, such as for plastics.