Want to Buy an Oil Well in the UK North Sea?

bg group jasmine
BG Group’s Jasmine platform in the UK North Sea, image: BG Group
By Dinesh Nair and Jillian Ward

(Bloomberg) — Want to buy an oil well in U.K.’s North Sea? There are plenty available as some of the industry’s largest names try to sell aging, costly wells that have become even less profitable with the plunge in crude prices.

BG Group Plc, Apache Corp. and Marathon Oil Corp. are among companies that have explored a sale of their North Sea assets, according to people familiar with the processes. In all, assets worth as much as 20 billion pounds ($30 billion) are currently for sale in the North Sea, said Dave Blackwood, senior adviser to investment bank Evercore Partners Inc.

Drillers have struggled in recent years to extract oil from the North Sea’s depleting fields, leading to reduced output and costs that jumped 26 percent last year. Oil has slumped about 36 percent since the Organization of Petroleum Exporting Countries’ Nov. 27 accord to maintain production at 30 million barrels a day, adding to the pressure for drillers to seek buyers.

Crude oil surged above $50 a barrel in New York and exceeded $55 in London as focus returned to a drop in weekly U.S. rig use amid strike at refineries that may cut supply. West Texas Intermediate traded as high as $50.56, erasing an earlier decline of 3.3 percent. Brent traded as high as $55.62 after slumping 3 percent earlier.

The U.K. North Sea has become “a less attractive destination for deploying capital,” said James Janoskey, global co-head of Credit Suisse Group AG’s Upstream business. He is skeptical that companies will be able to sell the assets until oil prices stabilize.

BG declined to comment. The company’s planned sale of its largest operations in the North Sea stalled last year after it couldn’t agree on a deal with potential buyers. A representative for Apache said the company would reveal its North Sea plans in its earnings call on Feb. 12. Marathon has said it plans to keep its North Sea business after receiving no acceptable offer for the unit last year.

The offshore fields, which first began to be exploited at large scale in the 1970s, helped cushion the blow from the collapse of U.K. mining and manufacturing in the 1980s. Now, their declining attractiveness poses a challenge to Prime Minister David Cameron, who faces re-election on May 7 and whose government is trying to encourage economic growth outside of London.

Government Measures

In December the government announced several measures to encourage North Sea investment, including reducing a tax on producers and adding incentives to carry out seismic surveys in under-explored areas. Further steps are likely to be announced in March, Chancellor of the Exchequer George Osborne has said. A new regulator, the Oil and Gas Authority, will be set up in April to aid production.

For many in the industry, the initiatives are too little, too late. Projects including Royal Dutch Shell Plc’s Draugen field are now at risk of being scrapped and companies such as Total SA may delay spending in the area until prices pick up.

BP Plc will cut about 300 jobs in the U.K.’s North Sea to cope with slumping oil prices and aging oilfields, it said on Jan. 15.

Decommissioning Costs

“The dramatic fall in the Brent crude oil price has serious implications for North Sea oil production and government revenues,” Anthony Lobo, U.K. head of oil and gas at accounting services and advisory firm KPMG said in an e-mail. “Many of the operators are struggling with containing their costs, and making any new finds worth developing under the current tax regime.”

Oil prices aren’t the only obstacle to potential buyers in the North Sea. The cost to shut down a well is more expensive in that area, especially for assets that may be decommissioned in just a few years. That may discourage certain buyers, which tend to look for assets that cost less to close down. Banks also demand tough financing terms for buying aging assets.

Decommissioning costs are a “key challenge to M&A in the North Sea,” said Jonathan Dent, vice president for mergers, acquisitions and divestments at Statoil. “Over time we’ve seen a doubling of costs going forward. About nine billion pounds of decommissioning required in the next 10 years is a real burden on M&A activity.”

Safe Environment

There are about 12 billion to 24 billion barrels yet to be extracted from the North Sea, according to a February estimate by Ian Wood, former head of engineering company John Wood Group Plc. Production has dropped 40 percent in the past three years as fields mature.

Sellers would fetch a lot less than a year ago. Based on recent averages of about $49 per barrel, the highest estimate of total output would be worth about $1.2 trillion. Last June the same amount was valued at nearly $2.8 trillion.

“The attractiveness of the North Sea still is that it is a very safe geopolitical environment and there is a sub-set of companies that want that exposure in their portfolio,” said Ian Sperling-Tyler, a partner who heads up the oil & gas team at Deloitte LLP. “But we do expect M&A volumes there to fall sharply in the wake of weaker oil prices.”

–With assistance from Nidaa Bakhsh in London.

Copyright 2015 Bloomberg.