2017 Annual Review
2017 Annual Review

North Sea decommissioning: Primed for a boom?

The complexities and challenges associated with decommissioning North Sea offshore oil and gas assets have dampened M&A activity in the past—but change is coming.

Following the sharp drop in oil prices in 2014, incumbent owners, keen to repair their balance sheets, started to view their aging assets as an opportunity to pass on these operations to smaller, more nimble players, whose businesses are better suited to carrying out smaller works and who are likely to enhance overall recoveries.

With an estimated 20 billion barrels of oil remaining in the UK Continental Shelf (UKCS) and oil prices starting to stabilize at a level at which both buyers and sellers are willing to transact, deal activity in the UK North Sea is seeing something of a revival. And the UK government, which has the ultimate responsibility for decommissioning the UKCS, is actively encouraging new investment.

This stability is prompting interest among producers and private equity investors, and the supply chain and service sector, where new business models and innovative deal structures thrive on the opportunity of decommissioning. There is also a growing appetite among infrastructure investors for pipelines and processing plants.

However, investors need to get comfortable with a legislative regime developed by the UK government: Previous interest holders can be liable for any default by current or future interest holders if there is a shortfall in security.

New entrants and incumbents are increasingly looking for effective—and indeed novel—ways to apportion decommissioning liability. Recent transactions show a number of innovative approaches to dealing with decommissioning liabilities outside of traditional Decommissioning Security Agreements. They tend to focus on the retention of decommissioning liability by the sellers, either by agreeing to remain financially liable or by utilizing their enhanced expertise to carry out the decommissioning itself. As more deals are crafted and precedents are set, realistic calculations of eventual decommissioning costs will become easier.



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