* Opportunities in other parts of globe more attractive
* Bigger packages have limited number of potential buyers
* U.S. firms see better return on capital from shale
By Claire Milhench
LONDON, Oct 10 A lack of buyers willing and able
to take on ageing oil rigs in Britain's North Sea has stalled
deal flow this year, creating a headache for North American
firms who are under pressure from shareholders to sell.
Marathon, Conoco and Talisman have
all put North Sea assets on the block, but the bigger packages
are slow to change hands due to wrangling over decommissioning
costs, financing problems for smaller buyers, and the fact that
some rigs have very little time left on the clock.
In the first three quarters of 2014 there were only 19 deals
in the offshore UK market, compared with 63 for the whole of
2013, according to data from Deloitte.
Just four deals were announced in the third quarter,
although large packages continued to come to market including
Conoco's 24 percent stake in the Clair oilfield.
"Everyone is cutting costs, cutting capital expenditure,
trying to sell down assets at the same time and there is a
paucity of buyers," said Stephen Murray, a partner at law firm
Herbert Smith Freehills. "The balance between sellers and buyers
is out of kilter."
"It's a buyers' market for exploration and development
projects," agreed Jon Clark, a partner at Ernst & Young. "They
can be relatively choosy."
The smaller, non-operated stakes are still able to find
buyers, with Premier selling stakes in three fields to
Hungary's MOL in the summer, but the
bigger, more complex assets are a problem to get away.
This is partly because previously active buyers with deep
pockets, such as the Chinese, have tightened the purse strings.
It is also a reflection of the fact that the North Sea is
seen as less attractive when compared with other opportunities
around the globe in Mexico, South East Asia and Africa.
"Sellers in the North Sea have to recognise that it is
competing for capital with other parts of the world that have
some attractive stories at the moment," said Neil Leppard, a
director at PWC.
Another stumbling block is that the bigger packages tend to
come with an operatorship, limiting the number of buyers. "Some
groups simply want a non-operated stake," said Drew Stevenson,
head of PWC's UK Oil and Gas Transaction Services team.
For the older assets, pricing and financing decommissioning
is still a problem, with transactions failing to complete
because parties cannot agree on how this burden will be shared.
Would-be buyers, particularly small independents, tend to
look for something that is "decommissioning light" because banks
and oil majors want them to stump up large amounts of security
to cover abandonment liabilities.
"The market just doesn't have the experience yet of pricing
decommissioning costs," said Stevenson. "Depending on which side
of the deal table you're on, engineers will have a very
different view. Then there is the whole question of how the new
investor finances that."
WHO WILL BUY?
For the oldest assets in their twilight years, a better
solution might be to seek a "transition owner" such as an
oilfield services company, suggested Philip Whittaker of the
Boston Consulting Group.
Firms such as Petrofac and AMEC are
developing specialist offerings to take elderly facilities from
the late life stage through the decommissioning process.
"Sellers need to take unsellable assets off the table.
Anything with less than five years to go before the cessation of
production date is not a transactable asset," Whittaker said.
For the rest, a new type of buyer needs to be wooed, such as
a refiner or utility company. Some German utilities already have
exploration rights in Norway and are interested in growing their
Hungarian refiner MOL first entered the UK North Sea when it
purchased Wintershall's non-operated assets late last year, and
is keen to acquire more.
"This could be a new type of owner - refiners are used to
dealing with a difficult, low margin business, which means
running your facilities very efficiently and being cost
conscious, which is what these assets need," said Whittaker.
But Spanish energy company Repsol's talks to buy
Canadian producer Talisman Energy were said to have hit the
buffers due to the unattractive nature of its North Sea assets.
Instead it is reportedly more interested in Talisman's Canadian
Rising costs and declining production in the North Sea basin
are part of the problem, but the ongoing uncertainty around the
UK's fiscal review and delays in setting up the new industry
regulator have also put the brakes on deal flow.
"We need to get on with things or investors will turn their
attention elsewhere," E&Y's Clark said.
It all adds up to a major frustration for North American
energy firms being pushed by shareholders to scale back their
international exposure and focus on opportunities at home.
For example, Apache, which is the third largest oil
producer in the North Sea and has spent billions of dollars
upgrading the Forties complex, is under pressure from activist
investor Jana Partners to restructure its business.
"Our biggest challenge in the North Sea is competing for
capital," said Jim House, managing director, Apache North Sea,
speaking at a conference in Aberdeen in the summer.
In July Apache said it had plans to sell or spin off its
international properties to focus on drilling higher-margin
shale wells in places like the Permian Basin in
It has denied press reports that it is looking to quit the
North Sea, but over the last year it has put a whole range of
assets on the block.
"Companies are prioritising - many U.S. firms feel they are
getting more value in the market for what they are doing in U.S.
unconventionals than they are for their international assets.
Why deploy $1 overseas if you get less value than deploying it
domestically?" said E&Y's Clark.
(Editing by William Hardy)