Opinion

Chrysaor and Enquest buying North Sea assets – two different financial approaches to decommissioning


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.

Magnus
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].”

Chrysaor
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.

Shell has agreed to cover a fixed $1bn of the decommissioning costs associated with the package of assets, and Chrysaor will take the remaining liability, estimated at $2.5bn. 

This means that Chrysaor has a big financial incentive to try to reduce the decommissioning costs, Mr Coleman says.

For this agreement to work, Shell must have been comfortable that Chrysaor was able to accept the decommissioning liability. Under UK law, if a company sells an asset to another company which is not ultimately able to pay for decommissioning (maybe because it goes bankrupt), the liability falls back to the selling company.

This set-up ensures that the government will never be landed with decommissioning liability if the buying company goes bust – but it can also put a spanner in the works for the sale of a late life asset to a smaller company who might be more motivated to do something with it. 

There could be some kind of escrow fund from Chrysaor's investors (EIG Global Energy Partners) – but at $3bn this would be an enormous sum even for a large private equity company, Mr Coleman says.

Or there could be a ‘letter of credit' guaranteeing that a bank would pay for the decommissioning, but again this means that the funds would need to be taken out of the company's balance sheet.

Shell says that its objective is part of a move to “high-grade and simplify [its] portfolio following the acquisition of BG, to ensure the company represents a world-class investment case.”

Different financial products
The complex financial liability issues might mean there is a business opportunity for someone who can develop a financial product which enables it to be managed in a different way, Mr Coleman says.

Mr Coleman says he is trying to develop special financial products which would relieve the selling company from some of its financial liability. “If they sold it in a different way, they could transfer the liability confidently to another party,” he says. 

An alternative arrangement could be an annual payment, where the operator makes an annual payment to an insurance scheme, which builds up a fund which is used to pay for decommissioning. This is similar to how we buy life insurance, paying annually then receiving a lump sum when we die, Mr Coleman says.

Of course there are risks that the decommissioning costs are greater than planned for, but the parties can make allowance for this – for example by making payments into a separate fund which can be made available to any company which is unable to cover its own decommissioning costs. There is a similar scheme for UK pension funds, with a pot of funds available if any company is not able to meet its pension obligations. 

The UK's Oil and Gas Authority (OGA), together with the Treasury (which manages the UK government finances) and the Department for Business, Energy and Industrial Strategy (BEIS) “all need to be supportive of some of these concepts,” he says. 

Another issue here is transferability of taxes. Oil and gas companies can claim money from the government to do decommissioning in the form of a rebate on corporation tax and other taxes they have paid. 

The tax is paid (during asset operations) as a proportion of company profits, but the calculation of profits does not include the cost of decommissioning. If it was, the profit would be lower.

However, if a platform is sold to another company shortly before the end of its life, it may not pay much corporation tax, so there will not be much to reclaim. However it is possible Chrysaor and Shell have found a way around this, Mr Coleman says, with Chrysaor somehow reclaiming back from taxes paid by Shell. 

Or perhaps both parties are expecting to get enough production (perhaps a decade) that Chrysaor will pay tax which it can then claim back, Mr Coleman says.

Greg Coleman was interviewed by Karl Jeffrey of Future Energy Publishing Ltd.


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