Decommissioning and security related issues have been one of the principal barriers to upstream oil and gas mergers and acquisitions activity in recent years.
The growing maturity of North Sea assets combined with the currently low oil price poses a major question as to whether the remaining revenue of many oilfields will actually exceed anticipated decommissioning costs.
Potential buyers of such an asset are, therefore, extremely cautious. Relatively recent developments which make the provision of decommissioning security more economic have helped buyers and sellers to overcome the hurdles and get deals over the line, but further innovative solutions are required.
In the past, a request for security might have been made separately by sellers’ and buyers’ joint-venture (JV) partners.
But the advent of the industry standard, field-wide Decommissioning Security Agreement (DSA) has alleviated the requirement to provide multiple security in the majority of cases.
Newly-introduced guaranteed tax relief on default decommissioning expenditure has also allowed buyers to move away from provision of security on a post-tax basis, reducing security required by 50-75%.
Notwithstanding this, many JV parties have not seen a reduction in security – and some have actually seen an increase – as a result of the effect of low oil prices on the calculation as well as the connected timing of anticipated decommissioning under their DSAs.
Given the current characteristics of the marketplace, what is increasingly apparent is that many North Sea assets are in the wrong hands.
We are now beginning to see seen a mixture of smaller, leaner companies, infrastructure funds and national oil companies looking to acquire these from majors who are keen to divest elements of their portfolios.
While a sale for positive consideration and a clean-break is still the most desirable outcome for a seller, we are seeing more innovative disposals of assets where elements of decommissioning or decommissioning liabilities have been retained by the selling party in order to get deals over the line.
In many of these there is an expectation that the buyer will be able to extend field life through greater investment in upgraded production facilities, infill drilling or tie-backs of satellite fields – options which the seller was not prepared to carry out.
Even in smaller scale transactions, there is benefit for a seller to delay its decommissioning spend and reallocate its resources elsewhere in the meantime.
By extending the life of the field, it is also hoped that the decommissioning industry will be more developed when it needs to be called upon – all of which should result in costs savings from the application of new technology and greater economies of scale.
It is in the buyer’s interest to extend field life and receive revenues from ongoing production for as long as possible, knowing it will not be responsible for costs of decommissioning the existing infrastructure at the end of field life.
There are different options available in structuring such a transaction.
Firstly, an asset can be sold or leased and then re-transferred to the seller at the point of decommissioning. This is the simplest approach for assets where the sellers hold a 100% interest, otherwise existing co-venturer consent would be required.
The key benefit here is that the seller may be better set up than the buyer – through scale, efficiencies and existing experience – to undertake decommissioning.
Another option is for the seller to remain liable for its transferred percentage share of the decommissioning costs of assets but only at the end of their field life.
While this may be the simplest approach overall, the seller will lose control over decommissioning spend unless it caps its liability or seeks contractual control over decommissioning activities. Obtaining full clarity on the tax relief position is also key to this structure.
There’s a further option for the seller to transfer its decommissioning liability to the buyer but provide them with interim credit support in order to secure these costs.
In this event, the seller would also obtain back-to-back security from the buyer where they could not meet the co-venturers’ security credit requirements.
Here, the seller would take the credit risk of the buyer’s security being weaker than its own – knowing it may end up being liable to co-venturers for the buyer’s share in any default.
From a seller’s perspective, depending on structure, it may be important to retain an element of continuing interest in the asset.
This allows them to police the addition of new facilities, drilling of wells, interim decommissioning, third party tie-ins, transportation and processing arrangements via the transferred infrastructure, ease of termination of field agreements in a hand-back scenario and other issues.
However, the ongoing resource required for this removes one of the key reasons for selling in the first place.
While the above options provide a rough template, there is no standard form that can be applied as a catch-all to infrastructure transactions. Innovative approaches that take account of the specific circumstances of both transacting parties are required.