Greg Coleman comments:
In January 2017 there were two big North Sea acquisitions – Enquest buying 25 per cent of BP's Magnus field ($85m) and Chrysaor buying some of Shell North Sea assets ($3.6bn approx.) Both transactions take a different approach to the decommissioning financing – and illustrate ways it can work
In the last week of January 2017, there were two North Sea asset sales announced, each with a different financial approach to decommissioning.
Enquest Petroleum acquired of 25 per cent of the 16.6 mboepd Magnus field from BP. The field is 160km North East of the Shetland Islands. The deal was announced on Jan 24 2017.
Chrysaor, a venture capital funded E+P company founded in 2007, acquired a group of Shell North Sea assets, in a transaction worth around $3.6bn. The deal was announced on Jan 31 2017. Both took a different financial approach to decommissioning.
They illustrate the different ways decommissioning financing can work, says Greg Coleman, consultant with Petromall. They also perhaps provide some ideas for alternative financing systems.
Mr Coleman is CEO of small cap operator Independent Resources, and formerly in various roles at BP, including group vice president overseeing health, safety, security and environment globally.
With the Magnus field, BP retains ownership of 75 per cent of the field, and all of the decommissioning liability. However Enquest becomes the operator of the field for its remaining years.
The field currently produces 16,600 boepd, so Enquest's share is 4,150 boepd. The reservoir has 15.9m boe of 2P reserves (about 3 years worth of production at 16,600 boepd). Enquest is paying $85m for the 25 per cent share, which will come out of its cash flow, so it pays no cash up front. It will also become the operator of the asset.
However, in the transaction, BP retains the decommissioning liability itself.
So you can say that BP is really selling the difficult work of getting value out of a declining reservoir, and aim to extend the time until decommissioning starts.
“That's a good approach for everyone,” Mr Coleman says.
BP would probably like its staff to be working on more high value projects (i.e. bigger reservoirs). “BP only wants things at a certain scale. Magnus is at the end of its life. BP would rather release the people to work on something else,” Mr Coleman says.
It is perhaps unexpected that BP wishes to keep the decommissioning liability, although maybe Enquest did not want to, or was not in a position to accept it.
“With big companies, the core competence is not taking these things apart,” Mr Coleman says. “When it gets to late life, the motivation for taking things apart, and removing debris is not something they can get excited about.”
Enquest has done a similar arrangement when it acquired the Thistle oilfield and platform in 2010 from Lundin UK, he says.
“Enquest has the track record of being able to demonstrate to BP and the regulators that they can successful manage that life extension, and in the process maximise economic recovery of reserves, which is an important agenda for the Oil and Gas Authority [OGA].”
In the second transaction, Shell has sold a portfolio of assets in the North Sea and West of Shetlands to a fairly new (founded 2007) private equity funded firm called Chrysaor.
There are a number of different assets involved, and Shell's ownership in each one (which it is selling to Chrysaor) ranges from 10 per cent to 100 per cent.
Chrysaor will assume operatorship of three of the assets which Shell currently operates, Armada (76.4%), Everest (100%) and Lomond (100%). 400 Shell staff members will transfer to Chrysaor as part of the transaction.
The agreed price is $3.0bn with a further $600m between 2018 to 2021 depending on the oil price. The package has an equivalent production of 115,000 bopd (Shell's share of the total production of the assets).
Chrysaor is funded by private equity – its investors are Harbour Energy and EIG.
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