As 2017 draws to a close, Richard Cockburn, partner at transatlantic law firm Womble Bond Dickinson, reflects on activity in the UK oil and gas industry over the past year and what is to come in 2018.
2017 has seen the UK North Sea upstream deals market kick back into life. Chrysaor’s USD3.8bn acquisition of a package of assets from Shell, signed early in 2017, and the more recent announcement of Serica’s GBP300m purchase of BP’s interests in Bruce, Keith and Rhum, have book-ended a period during which the higher oil price and lower operating costs have fuelled more deal-making.
Having advised Chrysaor and Serica in these transactions, we are seeing increasing confidence that 2018 will herald more North Sea transactions.
The Chancellor’s announcement on 22 November that the government will implement transferable tax histories for North Sea assets will add further impetus to the market. It has been clear for some time that the tax treatment of decommissioning costs has been dampening North Sea deal activity. The new approach, which the industry has been lobbying for intensively, should encourage more investment and more new entrants. It will allow new owners of North Sea assets to set off decommissioning costs against the transferable tax history. It should also assist with maximising economic recovery of the UK’s offshore oil and gas reserves, the objective which the Oil and Gas Authority has been pursuing since it came into being.
As the Treasury remarked in a guidance note issued to accompany the Autumn Budget announcement, “This should encourage new entrants and fresh investment for a basin that still holds up to 20 billion barrels of oil”.
Infrastructure investments continue in the North Sea, as illustrated by the USD250m acquisition by Ineos of BP’s interests in the Forties Pipeline System and associated facilities. We may see more transactions like these in 2018 although potential buyers can be expected to be very selective in identifying infrastructure which offers appropriate returns.
The domestic supply chain has been depressed significantly by the low oil price – UKCS supply chain revenues dropped 30% on average between 2014 and 2016 according to Oil and Gas UK’s 2017 Economic Report – and the oilfield services sector will be hoping for an uptick in activity during 2018.
And what of Brexit? Until we know what Brexit will look like, the impact on the UK oil and gas industry of the UK leaving the European Union is difficult to predict. Oil and Gas UK has called on the UK government to prioritise the maintenance of “frictionless access” to markets and labour and a strong voice in Europe for the industry. It has also asked for the protection of energy trading and the internal energy market. Many industry players are active globally in locations such as the Gulf of Mexico and Africa so they are used to dealing with political and financial risk. However, the earlier that there is certainty about the shape of ‘life after Brexit’, the sooner they will be able to plan ahead with confidence.