A rumoured tie-up between Repsol and NEO Energy would be a good fit for the Spanish firm which has one of the biggest decommissioning liabilities in the North Sea, an analyst has said.
If the deal goes ahead, it would create one of the largest producers in the North Sea, however, it is still unconfirmed.
It is no secret that Aberdeen’s NEO Energy is a takeover target as its backers, HitecVision, come “the end of their investment horizon,” senior analyst for Wood Mac James Reid told Energy Voice.
Repsol merging with NEO Energy would be “a good fit” as the Spanish firm aims to sell off its Norwegian business and focus on UK activity, the senior analyst explained.
This is despite the risk an incoming Labour government presents to NEO’s portfolio of currently unsanctioned assets.
Mr Reid said: “In Norway, we understand they’re looking to sell but in the UK, there is potential for growth.
“Obviously, we don’t know what’s going on internally with Repsol but when you look at it from the outside with an objective view, you think the NEO portfolio would fit them quite nicely because it gives them that growth, it gives them that longevity, they can focus on the on the decom assets while still investing in upstream.”
© Supplied by DC ThomsonCurrently, Repsol has a heavy decommissioning commitment in the UK as its portfolio is “ultra mature”.
Some assets will see the 2030s, the Wood Mac expert added, however, its current resources are dwindling.
“I think it’s the biggest decommissioning liability in the UK North Sea, it’s about $3 billion,” Mr Reid added.
In comparison, NEO Energy’s portfolio represents a larger opportunity for production as many of its assets are much younger.
Mr Reid said that taking over the Aberdeen-based business will give Repsol a “significant boost in production” as well as “longevity of production in the basin.”
This will give the firm “production and upstream revenue to offset some of that decommissioning spend that they’ll be going through in the coming decade.”
Labour’s political ‘rhetoric’ around the future of oil and gas and its implications for NEO
However, acquiring NEO Energy’s portfolio comes with some risk as some of the firm’s projects are not yet sanctioned.
The Labour Party, which is polled to win the vote on 4 July, has vowed to ban new oil and gas developments but Mr Reid believes its “rhetoric” has “changed somewhat”.
He said: “Previously, they went down the route of no further exploration drilling and now they’re saying, we will allow you to drill on existing licenses.”
The NEO Energy-operated Buchan project delayed its first oil forecasts to “late 2027” due to uncertainty over the future of oil and gas in the UK at a government level.
NEO is still aiming to have a field development plan approved by the end of 2024, but the “exact timing for achieving this key milestone and enabling project sanction” will be linked to “fiscal clarity from the next government”.
© Photographer: Jeff J Mitchell/GeFurther, a “fair chunk” of NEO’s UK portfolio is pre-production or pre-FID.
NEO picked up “quite a lot of licenses in the 33rd licensing round” both as an operator and as a partner.
If NEO wanted to “anything now for approval, you’d be looking at a approval under a Labour government,” he said.
Labour is also committed to raise the rate of the energy profits levy (EPL) to bring the headline rate of tax paid by UK firms to 78% while “closing loopholes” in the existing policy.
© Supplied by NEO EnergyReid also raised concern over the lack of clarity over what an incoming Labour government may consider a loophole.
“They haven’t been 100% clear on what they are, but it sounds more and more like they’re talking about the investment allowance under the EPL.
“The worst case scenario that the industry is very worried about is the removal of the capital allowances as well.
“For a pre- production project, losing those capital allowances would significantly harm the economics of these projects.”
However, Mr Reid is not convinced that the industry will see changes until Labour’s first budget, meaning oil firms might have to wait with bated breath.
Injecting some longevity into Repsol’s portfolio
There is still stability to be seized by Repsol in acquiring NEO Energy’s producing assets.
The Wood Mac Analyst added: “Even if you stripped out everything else from the portfolio, they’ve got on- stream production right now going out to the end of next decade, early 2040s.”
However, “real growth” for Repsol will come from the pre-production assets that NEO has its hand in,” he said.
“Some of those have been sanctioned, others are awaiting sanction. But that’s where the real growth in the stability in the portfolio comes from.”
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