Innovation and tech is driving the North Sea back to growth

Greater stability in the oil price, a drop in operating costs, a drive on innovation to maximise economic recovery and a series of new deals are creating a promising climate in 2018, according to industry experts.

Changes to the tax relief system could also lead to fresh investment in the UKCS, as new legislation comes into force in November this year allowing tax history for decommissioning to be passed from seller to buyer.

As Alasdair Green, head of E&P strategy at Anderson, Anderson and Brown in Aberdeen, observes in his column on the opposite page, our economy is in the thrall of the price of oil, but the factors that determine its cost are beyond our control.

Nevertheless, he says that current market conditions are sufficiently stable to allow deal growth, particulary where new technology can be applied and fresh investment raised.

Last month, Premier Oil announced it was pressing ahead with the development of the Tolmount gas field – one of the largest undeveloped gas discoveries in the Southern North Sea – which is expected to produce around 500 billion cubic feet (bcf) of gas from late 2020.

This article appeared in Deals 2018. A digital version can be found here.

Meanwhile, Tony Durrant, the company’s chief executive, said he expected an uptick in deal activity as the industry emerges from the downturn with the firm “on the buyside” of opportunities in the North Sea.

Durrant’s comments come as some of the world’s biggest names in the oil industry announce plans to sell off their assets in the UK Continental Shelf (UKCS).

US-based operator Chevron announced in July it was shedding a large package of assets in its Central North Sea fields including Alba, Alder and Britannia. Meanwhile, French company Total said it was looking to divest multiple offshore assets which could be worth around $1.5bn.

Clare Munro, Head of Energy & Infrastructure at Brodies in Aberdeen, said the stabilising oil price had opened up new deal activity.

She said: “An unstable oil price always creates a lag in deals on upstream business, as when buying an upstream oil and gas field what you are really buying is the projected revenue of that field.

“An unstable oil price always has an immediate impact on the deals market – something that has been well documented when the price drops, but is also true if the price goes up sharply.

“Sellers and buyers will always have a different view on what the asset is worth and that always creates difficulty in getting deals done.”

Ms Munro added: “Confidence is higher now. The oil price has stabilised to well above $50 a barrel and it has been around $70 for the last year or so.

“It is still a lucrative market and there is still business to be done.

“It is also key to remember that oil prices are in dollars. The fact that the pound has been doing less well is actually quite good for UK operators. They are spending in pounds but their income is in dollars.”

A push on innovation is responding to key challenges presented in the mature basin, where new discoveries are anticipated to be in the small to medium range.

It is anticipated that smaller, independent companies are likely to increase their share of acquisition and drilling.

At the Oil and Gas Technology Centre (OGTC) in Aberdeen, its Facility of the Future programme is working to meet an enduring challenge facing the industry – how to exploit the reserves in small pools, or marginal fields, where oil reserves worth an estimated £135bn to the UK economy are held.

Crondall Energy and the OGTC have joined forces to explore whether a compact, moveable and remotely-operated buoy could help extend North Sea oil production by opening up the small pools, some which have an expected lifespan of only around five years.

The study is being sponsored by several major names in the industry Premier Oil, Total E&P UK, Lloyds Register, Siemens, Wärtsilä, Ampelmann and BW Offshore.

Munro added implementing new technology in the field was still a “major challenge” with operators still risk-averse when it comes to testing and adopting new solutions given the possible impact on production.

However, she added: “Shared risk is really how we do business in the UK Continental Shelf and as a general observation the OGTC is fantastic at pushing the innovation side of things at what has been a very difficult time.”

The industry is hopeful that changes to the tax relief system will encourage further investment in the North Sea and give greater support for decommissioning projects.

There are more 250 fixed installations, over 250 subsea production systems, over 3,000 pipelines and approximately 3,650 wells, all of which must be decommissioned over the next four decades.

From November 1, Transferable Tax History (TTH) will allow those selling a UKCS oil licence to transfer some of its tax history to the buyer of the field. This is due to encourage companies to invest in late-life assets given tax relief on future decommissioning works can be claimed against historic tax payments.

Around 50 to 75 per cent of decommissioning costs will be paid to companies in tax relief, although there are some concerns within the industry that the terms may reduce as the oil price stabilises.

Munro said: “The transferable tax change is good news, it will remove a current barrier to assets getting into the right hands as they move towards the end of their lives and therefore facilitate deal flow.

“It is another tool in the deals tool box which will allow us to get things done.”

Decommissioning costs for the UKCS are estimated to £58bn at 2017 prices with the Oil and Gas Authority working to drive down the figures.

Munro added: “At the moment, companies are trying to put off decommissioning because the game is over at that point.

“There is still a lot that can be done, and is indeed still being done, in the North Sea.”