A decommissioning cost breakthrough is expected to set off a wave of private-equity (PE) investments in the North Sea.
Paul Exley, corporate partner in the London office of international law firm Baker Botts, told the Press and Journal PE firms were queuing up to get involved.
Deal activity is “poised to take off” in the final quarter of this year, with the momentum continuing during 2017, he said.
For a long time, the thorny question of who picks up the tab for decommissioning assets in an ageing basing has been a major sticking point for asset transfers.
But Mr Exley, who is involved in a wide range of international and domestic transactional work, with a particular focus on cross-border mergers and acquisitions (M&As) in the energy industry, said this was changing.
He said a growing acceptance of “lower for longer” oil prices and an increasing number of distressed assets were now forcing the issue, while “the very big guys” were starting to adjust their portfolios to reflect this new environment.
“All of this creates opportunities for investors,” he said, adding: “It’s an area where private-equity is getting increasingly interested.
“Funds have been accumulating large amounts of dry powder to deploy for the right opportunities.
“In the North Sea, some companies are trying to sell assets in a late stage of their life. Other companies may be better placed to prolong the life of these assets.”
Mr Exley said he had expected more M&A transactions last year and earlier this year, but buyers held back to see if prices would go lower and sellers to see if oil prices would go up again.
But the “real turnoff” for buyers had been the decommissioning liability,” he said, adding: “Historically, the model has always been that sellers expect buyers to take on this liability but the scale, complexity and uncertainty around decommissioning make this difficult.
“Add to that the tax aspect – tax reliefs are not always fully available to new entrants to the market – and it all becomes very difficult.
“But what we are starting to see is recognition from some sellers that if they want to do the deal, they are going to have to come to some accommodation for these liabilities to be retained or at least shared.
“At that point, private-equity houses start to get much more interested as the decommissioning costs can be significantly reduced.
“That is the breakthrough point which is encouraging people to be a bit more optimistic about the deal landscape.”
William Lamb, a partner in Baker Botts’ New York office, said the landscape of the oil and gas industry was “shifting dramatically”, with a surge in companies looking to decommission and dispose of their assets due to the lingering weakness in oil prices.
Mr Lamb added: “As relationships with commercial bank lenders continue to change and public equity markets remain volatile, due to economic instability, one option for upstream companies looking to remove assets from their portfolios, and turn them into cash, is to partner with PE firms.”
According to a recent EY global survey of 100 PE firms active in the sector, 25% were planning acquisitions before the end of this year and 43% during the first half of 2017.
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