North Sea Oil Industry set to Face Stormy Seas
October 7 this year marked the 44th anniversary of the discovery of the North Sea’s Forties field. With five billion barrels of oil, the BP-operated field became the largest oil field in the British sector of the North Sea, reaching a peak output of 500,000 barrels per day in 1979.
In 2003, BP sold 96 per cent of its share in the field to Houston-based Apache Corporation, which discovered a further 800 million barrels of oil in the Forties formation.
News in October that Apache, the North Sea’s third-largest oil producer after Shell and BP, is seeking to sell off its North Sea assets seems to put in question the North Sea’s future as a major oil-producing resource. US companies Marathon and Conoco, as well as Canada’s Talisman Energy, are seeking to divest their North Sea assets, but there are few bidders.
No Confirmation of Apache Asset Sale
Apache paid US $800 million for its Forties acquisition. The company has not confirmed outright that it is going to quit the North Sea entirely, but British and European press reports speculated that the company has hired investment bank Goldman Sachs to find a buyer for its North Sea assets. If the sale goes ahead, the asking price for this Forties field stake could be questionable and changeable, as the North Sea no longer is as attractive an investment option as it was decades ago.
Changing Legal and Fiscal Terms
As always, the issue in the North Sea is political. British governments have used it as a cash cow throughout its producing lifetime, changing the legal and fiscal terms for investors nearly every year.
The Treasury has been conducting an extended review of North Sea taxation. Long-awaited tax breaks for investors are expected in Chancellor George Osborne’s Autumn Statement, but few are holding their breath. Many companies are afraid that responsibility for the bulk of North Sea taxation could be devolved to the government in Scotland. In such a case, North Sea taxes are likely to rise to fund Scotland’s generous social welfare system.
Liabilities and Financing Problems
There are further problems. The North Sea is now full of old oil rigs that have high decommissioning costs, while smaller oil companies that would like to invest are finding finance hard to come by.
Apache Corporation has been under sustained pressure from activist shareholders to sell off its international assets and to become a wholly US-centred company concentrating on shale oil and gas operations. A hedge fund, Jana Partners, has exerted the greatest pressure to date.
As a result, Apache is selling off its gas operations in Western Australia and in Egypt.
Other US oil companies have been subjected to similar shareholder pressure to quit international operations and to focus on domestic opportunities.
Some North Sea operators have been able to sell small assets, such as Premier Oil’s sale of small fields this year to Hungary’s state-run oil company MOL. But the hard part will come when Apache or another large operator tries to sell bigger assets.
Previous buyers who were deemed to have deep pockets, such as Chinese oil companies, have started to restrict their spending. Meanwhile, medium-sized majors such as Spain’s Repsol, previously eager to extend its North Sea interests, is also opting to invest in North America.