M&A wave improves prospects for UK North Sea

A wave of mergers and acquisitions is raising hopes for a gradual recovery in the UK's North Sea oil and gas sector, with new operators coming to prominence at a time of uncertainty over future investment, and environmental pressures.

The North Sea industry, which produces crude grades such as Brent and Forties that contribute to the Dated Brent benchmark, has long faced warnings of decline, even as the region, including Norway, accounts for 3% of global oil output and meets a significant share of Europe's gas needs.

UK oil output fell 7% last year to just over 1 million b/d, and S&P Global Platts Analytics forecasts a steepening decline from next year to 2027, when it expects output to fall to 607,000 b/d.

The sector has faced multiple challenges in the last year including restrictions on offshore activity due to the pandemic, cuts to capital budgets and rising scrutiny of its CO2 footprint.

However, there has also been a spate of M&A announcements in recent weeks, suggesting a willingness to invest in further projects, albeit the recovery lags Norway, where tax breaks have spurred a flurry of development commitments, most of them small, but targeting at least 275 million barrels of oil equivalent.

Mark Munro, senior vice president of Norwegian bank DNB, told an event for the UK industry this month there was still capital available for the sector provided companies link their strategies to the energy transition.

The last week has seen privately owned Neo Energy buy fellow independent Zennor Petroleum less than a month after Neo announced the purchase of most of ExxonMobil's UK upstream business, and seven months after it bought a clutch of Total assets. Neo expects to almost triple its oil and gas output to stable rates of 90,000-100,000 boe/d in 2022-2026 on the back of Zennor's Finlaggan project and other prospects.

And this month should see the completion of the sector's biggest current M&A deal: private equity-backed Chrysaor's merger with Premier Oil to form Harbour Energy, which will be listed on the London Stock Exchange and could become the UK's largest oil and gas producer.

A somewhat more negative tone was struck by Cairn Energy's announcement March 9 that it is selling its minority stakes in Premier's Catcher and EnQuest's Kraken fields to newcomer Waldorf Production, citing the fields' expected decline.

Nonetheless, such deals are portrayed as putting assets in the hands of companies committed to maximizing the region's potential, and appears to be contributing to a shift in mood.

Back in November, John Evans, CEO of North Sea contractor Subsea 7, was complaining to investors about a lot of "financial engineering" going on without much actual investment, while companies like his had to manage differences between pandemic regimes in England and Scotland, or "sub-elements" of countries, as he put it. By last month, however, he was describing the UK as a "bright spot," with activity picking up.

There is no doubt the sector faces challenges, with a swath of maintenance shutdowns set to reduce production this summer, and intensifying regulatory pressure.

At an industry webinar March 3, Deirdre Michie, CEO of industry group Oil & Gas UK, said offshore activity was still a quarter below pre-pandemic levels and highlighted uncertainty over investments awaiting approval; these include sizeable West of Shetland projects such as the Cambo and Rosebank oil developments and a potential expansion at BP's Clair field.

Government support

At the same event, the government's minister for business, energy and clean growth, Anne-Marie Trevelyan, noted a "growing list of challenges" for the sector, particularly in curbing its operational emissions, thought to account for 3.5% of total UK emissions.

Progress is being made in one area, the effort to curb flaring of unwanted gas, according to regulator the Oil & Gas Authority; the volume of gas flared offshore dropped by 22% last year, although "venting" of gas directly into the atmosphere without combustion increased somewhat. Various schemes are also being developed to bring low-carbon electricity to offshore installations to help curb emissions.

With the industry starting to address the emissions challenge, Jon Clark, a partner at financial services firm Ernst & Young who has worked on recent M&A deals, struck an upbeat note. "New or growing organizations committing material sums of capital to the UK continental shelf is a very positive sign for the sector's future," he told Platts.

For the government, Trevelyan was also broadly supportive. "We want the UK continental shelf to remain an attractive investment destination and to work with the sector in repurposing our energy system," she said.

"The mature basin and decline of production combined with aging assets does present a further challenge," she said. "But if there is one thing that characterizes the oil and gas industry, it is the resilience you have shown and the talent for innovation of your supply chain."

UK North Sea M&A (selected deals)

Date announcedBuyerAssetResource volume (mn boe, estimated)

Jan-20Jersey Oil & GasEquinor's Verbier oil discovery stake17.5

May-20Neo EnergyTotal selected assets51

Jun-20EnergeanEdison E&P (excluding Norway assets)85 (UK portion)

Jul-20EnQuestEquinor's Bressay heavy oil field stake115*

Oct-20Harbour EnergyPremier Oil (merger)500 (Chrysaor)+163 (Premier**)

Feb-21EnQuestSuncor Golden Eagle stake18

Feb-21Neo EnergyExxonMobil assets140

Mar-21Neo EnergyZennor Petroleum40

Mar-21Waldorf ProductionCairn Energy Catcher and Kraken stakes43

* depending on development concept