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Asset sales, field developments and innovation underpin significant activity in UKCS

October 2018  |  SPECIAL REPORT: ENERGY & NATURAL RESOURCES

Financier Worldwide Magazine

October 2018 Issue


The UK Continental Shelf (UKCS) is enjoying a period of significant deal activity and development announcements, with more expected to be on the way. July and August saw a huge number of deals done and significant marketing activity, with Chevron announcing its intention to market its Central North Sea assets, ConocoPhillips selling its remaining 16.5 percent interest in the Clair Field to BP, and Serica and Total signing a sale and purchase agreement for Total’s interests in the Bruce and Keith fields, adding to the Bruce, Keith and Rhum interests Serica purchased from BP in 2017. Neptune and Apache entered into a sale and purchase agreement for the transfer of certain Central North Sea assets, Ithaca committed to purchase the Greater Stella Area interests from Petrofac and Dyas, and North Sea Midstream Partners was acquired by Wren House from ArcLight Capital in a very competitive sale process.

Early September also saw another significant deal announced, with Hurricane and Spirit entering into a farm-in arrangement whereby Spirit will initially cover the cost of a £139m campaign to drill three wells to further prove the potential of the Greater Warwick Area, West of Shetland – an area which holds an estimated two billion barrels of oil. The partners will then work toward a final investment decision (FID) on the first phase of a full field development on the Greater Warwick Area by 2021. This project is expected to unlock initial reserves of half a billion barrels from the current Greater Warwick Area resources, and comes on the back of more good news for the West of Shetland area, as Siccar Point announced the successful appraisal well drilling of its Cambo discovery, which will be incorporated into the field development plan that is currently being prepared.

In more good news on the field development front, in late August, Premier Oil announced that the Tolmount Field group, a joint venture between Premier and Dana, had taken a positive final investment decision on the Tolmount development. The key to unlocking this deal was Premier securing an innovative commercial structure for the project which minimises Premier’s capital expenditure while maintaining its exposure to the upside in the Greater Tolmount Area. The arrangement involved the creation of an infrastructure joint venture between CATS Management and Dana, which will own and pay for the construction of the Tolmount platform and pipeline to shore, as well as the upgrades required to the onshore Easington terminal.

The development of this unique and groundbreaking contractual structure was the result of a collaboration between the commercial and legal teams of Premier, Dana and CATS, and involved complex regulatory issues and the development of a bespoke suite of contractual arrangements, as well as the tender and placement of the platform and pipeline contracts. The overall process took over a year.

The Tolmount deal is interesting in many ways. It demonstrates the key themes of private equity investment and the continuing role of infrastructure specialists in the UKCS. It also extends the role of an infrastructure owner closer to the wellhead than any previous project, and it involves them right at the beginning of project development, rather than as a purchaser of developed infrastructure. This model could prove very attractive to other UKCS licensees considering alternative ways to sanction CAPEX projects, and other UKCS infrastructure providers looking for new areas to expand into.

In the fourth quarter of the year, activity is expected to remain high as the transferable tax history (TTH) rules come into play. The concept of TTH was announced in the autumn 2017 budget, after prolonged consultation between the industry and HMRC. Draft legislation was published in early July 2018 and the rules will apply to deals which complete on or after 1 November 2018. The aim of TTH is to facilitate the sale of late-life fields to new investors by ensuring the availability of tax relief on decommissioning expenditure.

Because decommissioning tax relief relates to ring-fenced corporation tax (RFCT), currently a potential purchaser acquiring late-life assets which has insufficient RFCT tax history may not be able to fully offset decommissioning losses – even though, over the life of the acquired asset, significant RFCT on profits will have been paid, and the seller of the asset would have been able to fully offset the same decommissioning expenditure.

This issue has been blocking potential late-life deals. The TTH rules aim to address this by allowing the seller of a field to allocate a portion of its previously earned RFCT profits to a buyer for the purpose of offsetting decommissioning expenditure.

The significant number of recent deals and developments, as well as new, innovative ways of doing those deals, as well as the developments and the imminent arrival of the TTH, all point to continuing activity in the UKCS deals sector and a positive outlook for the foreseeable future.

 

Clare Munro is head of Energy and Infrastructure at Brodies LLP. She can be contacted on +44 (0)1224 392 253 or by email: clare.munro@brodies.com.

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