North Sea Decommissioning Costs Weigh on Oil Firms

M&A in ageing North Sea stagnant after oil price drop; removing decommissioning costs could spark deal making.

Oil firms trying to sell ageing North Sea oilfields are considering shouldering hundreds of millions of dollars in future dismantling costs to help find buyers, industry sources say.

One of the world's oldest and most important offshore oil and gas production basins, the UK North Sea faces dwindling output and a growing number of redundant platforms that require decommissioning in a scale and complexity never seen before.

The near halving of oil prices over the past year to below $60 a barrel has forced the industry to slash spending, increase efficiencies and sell or shut down assets that are least profitable or which do not fit their portfolios. [ID;nL8N0ZQ2M8]

But despite a large rise in the number of assets up for sale in the North Sea in recent months, only a few deals have been completed.

"There remains a very big gap between buyers and sellers and that hasn't been narrowing the way some expected," said Christopher Young, director of the Strategy Group at KPMG.

Decommissioning, which involves plugging wells with cement on the seabed and removing obsolete platforms and pipelines, has proved to be a major stumbling block for deals.

As companies come to grips with an extended period of low oil prices, the urgency to sell assets is growing. As a result, boards are weighing up new strategies.

"A lot of companies under stress are now starting to consider if retaining some or all of the decommissioning liability might be an option for selling," Young told Reuters.

"Our conversations with a number of North Sea operators suggest that others are now considering selling assets while retaining decommissioning liabilities."

BP and Total are among several field operators considering such a strategy, according to the sources.

"On the big old fields, which is what the majors are selling, decommissioning is a major issue. They have been trying to sell some of those fields for quite some time. It's unattractive to take on those decommissioning liabilities," Tony Durrant, Chief executive of Premier Oil told Reuters.

"The others, including BP, are coming around to the view that the only way they can reduce their assets in the UK is by retaining those liabilities."

Decommissioning costs can reach hundreds of millions of dollars for the larger North Sea assets.

Total decommissioning costs in the UK continental shelf over the next 30 years are expected to reach around 50 billion pounds ($78 billion), according to a strategic industry review by sir Ian Wood for the British government.

BP, which has been selling assets in the North Sea since 1996, said it is considering all options.

"Our preference is to sell assets with the decommissioning liability, however the agreements reached with buyers are deal specific," a spokesman said.

Total was not immediately available for comment.

DE-RISKING
The concept of shouldering the decommissioning costs was used at least once when BP sold to DNO in 2003 the Thistle field, today operated by Enquest.

The oil price drop also offers opportunity for buyers, particularly private equity funds such as Caryle Group, and Riverstone to invest in the North Sea.

Removing the decommissioning costs would make late-life assets more attractive and remove a lot of risk buyers might associate with them.

"The number of potential buyers for such assets will be far higher than is the case in a traditional sale," a KPMG report said.

At the same time, seller will receive a higher price for the asset which would boost balance sheets in the short-term.

But the risks for sellers are significant as they will have to earmark large sums of money for the future decommissioning. Legal pitfalls may also arise, KPMG said.

By Ron Bousso and Karolin Schaps