Exploration and production companies merging and acquiring one another usually grab the headlines and sit front of mind against the backdrop of a low oil price environment.
But take a further look across the industry and we should see a notable number of transactions in the midstream sector, specifically in infrastructure.
Until recently, it’s been an area of the market paid little attention – infrastructure tends to be like that. Historically, big oil and gas operators developed and owned what they needed, transporting their oil discoveries through proprietary pipelines and refining it in their own processing plants.
That’s largely remained the case, save for the last two or three years. The UK Continental Shelf (UKCS) has evolved and the model changed with it, driven by two principal pressures – the basin’s age and the oil price decline of the past 24 months.
The first makes the North Sea high-cost, which has seen many of the majors look to divest and focus on other regions of the world.
The second has forced many companies to reassess their portfolio of assets and consider rationalisation. Many have dividends to protect and, despite the challenges presented by the commodity price, only ConocoPhillips has had to cut its payments to shareholders so far.
Infrastructure, meanwhile, is often considered to be ancillary for oil producers. It is less complex to value than oil and gas reserves, and there’s a ready market at the right price. No surprise then that infrastructure has become the go-to asset for divestment.
The likely buyers? Private-equity and energy-focused funds. Just look to BP’s £324million sale of the Central Area Transmission System (CATS) to Antin Infrastructure Partners as an example. Antin had bought BG Group out of its stake the previous year, giving it near-complete ownership of the asset.
Such transactions aren’t new, but they are relatively novel for the North Sea. The third party ownership model has been employed successfully in the US shale gas market for years, while oil and gas infrastructure in the Netherlands and Norway is commonly owned by private-equity or pension funds.
Private-equity houses are doing this with a view to providing focused management of the asset, making it more efficient and cutting costs.
They’ll do this with the aim of creating a portfolio of infrastructure, divesting the asset over the course of a decade and ultimately selling the collection on to a new owner – most likely a pension fund looking for a steady, reliable and diversified source of income.
What does this mean for the North Sea? Well, in short, it is a positive step for everyone. Private-equity has a reputation for short termism but that’s not the case in the kind of players looking at the UKCS. These are more like energy funds, with technical expertise and a solid understanding of and commitment to the industry.
Their involvement will see infrastructure placed in the hands of owners who will be wholly focused on it and seek to make the most of its potential. That can only be a positive step from a longevity perspective.
Secondly, it will mean more infrastructure is kept operational for longer. There’s been much talk of how to make the most of the remaining 20billion barrels of oil still sitting at the bottom of the North Sea – infrastructure assets will be critical to extracting that.
In fact, new infrastructure could even be laid to connect existing assets and drive further value from them.
Finally, the shift towards new ownership will inevitably bring about consolidation, with more midstream funds entering the market. Investment will focus around some key infrastructure and provide much-needed funds for improvements.
There’s a strong appetite out there for North Sea infrastructure but only at the right price. Energy focused infrastructure funds will be a likely source of investment and, as the oil price continues to take its toll and more operators are forced to divest non-core assets, deals will be done. It could be just what the industry needs.
Shaun Reynolds is a director of transaction services at Deloitte