The “wall of money” that played such a big part in driving North Sea asset and supply chain deals prior to the 2008 global banking debacle has disappeared.
What had been a seller’s market has swung in favour of buyers and they appear to have a huge choice, with a reported £3billion worth of UK Continental Shelf oil and gas assets on the market.
Prior to Chancellor George Osborne’s Budget debacle, it is understood that there were signs of a tentative recovery, driven by returning confidence and buoyant oil prices.
But this has been stopped in its tracks. Indeed, there has been speculation that at least one operator, ConocoPhillips, has pulled assets off the market.
Graeme Sword, former head of private equity (P/E) player 3i’s oil, gas and power business unit and now an independent practitioner, has told Energy that the market is the strangest it has ever been in his experience and that the Osborne Budget will aggravate an already difficult situation.
“There are more assets than ever for sale, but there are few buyers. Aside from Osborne fallout, there is a lack of capital to buy these asset packages coupled with not enough teams with the necessary abilities needed to convince the majors to sell to them and to get government approval for transactions.”
Sword pointed out that the mound of assets currently offered to the market by the majors also signalled that they had no investment plans for those assets and that this has production decline implications.
He agreed that Osborne’s tax raid would probably result in more assets being dumped into the “for sale” hopper, risking overloading the already buyer’s market.
As for the “wall of money” that helped drive so much activity until the banking crisis, Sword said: “That wall has gone. Capital for exploration and production companies is not nearly as readily available as it once was.
“Private equity funds have their own issues: they’re still recovering from the 2008 collapse. They all have challenges to contend with in their existing portfolios and so raising capital from P/E isn’t easy.
“The banks still have their problems, too, and remember, it was the banks and P/E companies that were the main suppliers of capital to the independents.”
Sword said public markets such as London’s AIM (Alternative Investment Market) were no longer as easy to access for new-start companies, although those established on that board can still raise capital.
“So new players are finding it hard to source the money to finance their ambitions, let alone anything else that might confront them. Historically, it would have been P/E-backed buyers that would purchase a lot of the packages. That’s no longer the case.
“Its curious, but P/E has gone almost full circle. It used to see value in production. You could buy producing packages and that was low risk and you could deliver a return.
Graeme Sword said: “As asset prices went up and there were more buyers, P/E took more risk, moving into the development phase, even though associated risk/reward doesn’t really work because the risk of overruns can be prohibitive.
“Yet P/E is now going to the place I said it never would – exploration. But they don’t have strong enough balance sheets to handle such risk.
“I think what P/E will move to now is fewer deals; those that it does will be bigger, and the reason why they would be bigger is to give a candidate company the capital needed to drill a clutch of exploration wells, enough to enable a statistical chance of success.”
Sword said it begged the question that, if a P/E player was to provide a company with the capital needed, which would be the best North Sea state to do this?
“It’s simple: if it’s exploration, I would look at opportunities in Norway with its tax incentives, rather than the UK,” he said.
“The UK should follow Norway by giving a big exploration incentive. Norway’s model is simple; the state is your partner. It will bear 78% of costs when things don’t go well and its going to take 78% when exploration goes well.
“In the UK, the Treasury will now take 62% of the proceeds when you’re doing well, but they’re not prepared to give an incentive up front.”
Sword warned of capital drift out of the UK to other places, and not just Norway.
He agreed that there was an irony with the new UK situation in that oil resources are harder to find and access worldwide and there’s greater competition for what there is.
“Ask yourself whether KNOC’s (Korea National Oil Corporation’s) purchase of Dana, the first big Asian company deal for the North Sea, will be the last. I suspect not, but it depends on the fiscal regime being conducive.
“Meantime, for all E&P companies, any tax increase, no matter how analysed, means a negative end result.