With offshore wind in sight of its Holy Grail, and oil companies experiencing a renaissance, the North Sea is primed for a badly needed investment boost.
Oil fields are being placed in the right hands as majors step aside from non-core assets, while the supply chain can realistically hope to attract private equity funds.
Offshore wind has made so much progress that developers may soon be able to get projects off the ground without government subsidies.
Mike Beveridge, managing director at investment banking firm Simmons and Company International, said the wind industry had become “very serious” and was proving more cost competitive as larger turbines capable of generating more power are introduced.
He said: “As new technology is adopted you have an industry that looks like it can operate without subsidies.
“Getting to a subsidy-free offshore wind environment was always the Holy Grail, so if we’re in sight of that, then the industry is going to continue to develop and that’s really positive.”
Mr Beveridge observed that more oil service companies are “gravitating” towards what has become a “very attractive adjacent market”.
It is an eye-opening trend, given that no such businesses were serious about offshore wind as recently as three to four years ago.
“Offshore wind fits nicely alongside offshore oil and gas services,” he said.
“It gives growth and diversity.
“We’re seeing more mergers and acquisitions transactions that have an offshore wind flavour and we expect that to continue.”
The UK continental shelf (UKCS), in general, is a good place to invest now, whether that’s in oil and gas or renewables.
Mr Beveridge said the North Sea oil sector was going through a “strong renaissance”, having itself been “uninvestable” after crude prices plunged in 2014.
He recalled a headline published by The Sun in 1992 which was thought to have contributed to then-Labour leader Neil Kinnock’s general election defeat.
It read: “If Kinnock wins today will the last person to leave Britain please turn out the lights.
“That headline acted as a swing factor in the election,” Mr Beveridge said.
“That was a mantra a lot of people were using in the UKCS three years ago.
“It seemed like a mature province that was going to die, but it’s a very different place now.”
At the start of the downturn, the global environment for the sector was one of fear and panic.
The world was oversupplied with oil and Opec seemed powerless in the face of US shale production.
Companies had to work out how to survive at a “lower for longer”, if not “forever”, oil price.
Meanwhile, climate change was climbing up the agenda and electric vehicles were going to “take over the world”.
Fast forward to mid-2018, and there has been a sustained recovery in the oil price, thanks largely to Opec’s ability to reduce output, and demand growth is strong.
In the UK, the industry now has a “well respected” regulator in the Oil and Gas Authority. In fact, it is so adept at driving good behaviour it is being referred to as the “Carlsberg regulator” in some quarters – for being “probably the best”.
Less encouraging is the prospect of production decline due to lack of investment in new oilfields.
Mr Beveridge said: “The macro view is that the oil and gas market is very different.
“Costs are down and the breakeven oil price is down.
“There is a much more measured view of the world in terms of replacement of oil by other products.
“There is less noise about electric vehicles. They will disrupt over time, but are not going to stop oil demand in its tracks.
“Put all of that in the mix and the environment looks exciting.”
He believes majors selling off non-core assets to private-equity-backed newcomers and independent oil firms is good and likely to continue.
Shell’s divestment of stakes in 10 North Sea fields to Chrysaor made huge waves in the basin last year, while Neptune Energy and Siccar Point Energy have also been busy.
On the other side of the coin, Shell is investing in redeveloping the
Penguins field and tying Fram back to the Shearwater platform.
US major Chevron has now confirmed plans to sell its entire central North Sea portfolio and ConocoPhillips is reducing its stake in the Clair field, west of Shetland, in exchange for assets in Alaska.
Meanwhile, Total is understood to be preparing to sell its interests in a number of fields acquired in the takeover of Maersk Oil.
Mr Beveridge said the developments should create hope, not despair.
He said: “It’s a perfect dynamic. If you were going to design a market you would want it split between major IOCs (international oil companies) who can set standards and get behind the biggest projects on one side.
“On the other, you’d have resources being put in the hands of independent companies looking to invest. That trend is going to continue.
“Buyers and sellers are comfortable doing deals at this oil price.
“It takes two to tango, but three years ago you had sellers with no buyers.
“Now you have owners comfortable in the knowledge that they’re going to get a fair value for assets they don’t want and buyers willing to pay sensible prices.
“We will see more asset changes happening, which is a fabulously good thing for the basin.
“You have operators for whom each asset is an important asset. Those companies have an economic strategy for those assets.
“It’s hard not to be enthusiastic about the next five years.
“If there is a worry about majors leaving the basin, then it is a matter of vanity, he said.
“Majors exiting some fields is a really good thing,” he said.
“But they’re not exiting entirely.
“They’re high-grading their assets and divesting those that are not core to them. If there are willing buyers, that’s fundamentally a good thing.
“If BP and Shell announced they were leaving that would be a worrying sign but they’re not.
“BP and Shell are saying the North Sea is a profitable region for them.
“The oil price is strong and costs are low. The tax burden is understood and manageable.
“It is a positive environment to work in. The fact that Shell and BP are committing is a real positive.
“So the story is not one of majors leaving, it’s about majors reinvesting in the basin and offloading non-core assets to those who are better placed to exploit them.”
Mr Beveridge said the world at large was starting to see that the North Sea is still an important place to do business and that there are strong M&A drivers for supply chain companies, as well as operators.
Furthermore, he has already observed signs that private equity investment will come back to the supply chain in the next 18 months.
Most private equity spend during the current cycle has supported
operators in their attempts to beef up their portfolios. Previously oil service firms were a target for PE.
Lime Rock Partners’ initial investment in EnerMech in 2008 serves as a prime example. But that has not happened this time, yet.
Mr Beveridge said: “Private equity has always invested in the supply chain but there has been a lack of deals in recent years.
“The supply chain has been going through difficult times with earnings falling rapidly so that makes it hard for private equity guys to do
“No one wants to catch a falling knife. It’s easier to invest in the recovery phase, when you can use debt to finance acquisitions.
“But private equity investment will come back. We’re involved in a few deals and know of some others that will go to private equity.
“They involve businesses with quite a strong UK focus. There are some UK companies that are 100% export businesses, whereas I’m talking about companies that are more focused on UKCS.”