Shell Shows How to Remove Obstacles to North Sea Oil Deals

Photo: 2017 Bloomberg L.P

(Bloomberg) — Royal Dutch Shell Plc’s $3.8 billion sale of North Sea oil and gas fields creates a model for further transactions in a region where the question of who pays to remove decades-old offshore platforms has been an obstacle for other deals.

Shell’s agreement with Chrysaor Holdings Ltd. included the condition that Europe’s largest oil company covers $1 billion in decommissioning costs, leaving the private-equity-backed explorer with an estimated $2.9 billion of liabilities. Sharing end-of-life costs between buyers and sellers is likely to remain the trend in the North Sea, where the billions of dollars of spending required to remove aging platforms and pipelines over the coming years presents a “real challenge” to deal-making, according to consultant Wood Mackenzie Ltd.

“The trend recently has been for oil majors to sell their assets in the North Sea and the decommissioning costs have often been a real challenge for deals to go through,” Ian Thom, senior research manager for U.K. upstream oil and gas at Wood Mackenzie, said by e-mail Tuesday. “Innovation in deal structures and sharing of decommissioning costs between buyer and seller” is likely to be the model for further transactions, he said.

Many oil and gas fields in the U.K. North Sea — first tapped in the 1960s — are nearing the end of their working lives. About 17.6 billion pounds ($22 billion) will be spent on decommissioning offshore infrastructure through to 2025, Oil & Gas U.K., the industry lobby, said in November. Many of these declining assets still offer a long period of potentially attractive returns for firms like Chrysaor, which expects some of the fields acquired from Shell to be producing 20 years from now.

“Decommissioning is a major area of concern in any North Sea deal,” said Stephane Foucaud, an analyst at GMP FirstEnergy. “In most situations, smaller players have tried to leave as much liability as possible with the seller.”

The question of who would be responsible for decommissioning was a key negotiating point throughout the sale of Shell’s assets to Chrysaor, said a person familiar with the matter, who asked not to be identified because the talks were private. Like Shell, an increasing number of major oil companies are beginning to show flexibility on assuming some of these liabilities, the person said.

Last week, the U.K.-focused oil producer EnQuest Plc bought a 25 percent stake in the Magnus field from BP Plc as well as stakes in nearby infrastructure in a deal worth $85 million. While BP will retain the decommissioning liability, EnQuest will pay a “deferred consideration” for a share of those costs, according to the statement. This gives the buyer a stake in an “efficient decommissioning program,” said Wood Mackenzie’s Thom.

In the U.K., there have been few large-scale decommissioning projects completed, with 6 billion pounds spent so far, Wood Mackenzie said in a report on the topic in November. The consultant expects such spending to eventually total 53 billion pounds, of which about 45 percent would be covered by the U.K. government through tax relief to companies.