Innovative approaches to decom liabilities facilitate asset sales

When Shell and Esso sold their jointly-owned Anasuria cluster of North Sea assets to two independents earlier this year, it was a rare case in which the buyer received some protection from decommissioning liabilities.

Premier Oil's recent deal with E.ON provided one template for getting around liability issues (Image credit: Premier Oil)

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A few more deals of this type will need to take place for M&A activity to really pick up, industry sources have told Upstream Intelligence.

New entrants to the North Sea are looking to step in and revitalize old fields or continue production from existing fields, according to the M&A manager of one operator with North Sea assets. But he noted that these companies typically come on board with no assets or no cash, and are therefore in no position to take over decommissioning liabilities.

Sellers on the other hand are still reluctant to carry decommissioning liabilities, the head of oil and gas at a large investment banking firm told Upstream Intelligence. “The industry needs two or three more deals which include an abandonment provision on the side of the seller and that will remove the psychological barrier,” said the source, who also spoke on condition of anonymity.

Shared liability may be the way forward

These times of low oil prices and aging North Sea fields have called for innovative measures, and a few operators have responded.

Earlier this year, E.ON agreed to share the costs of decommissioning the Ravenspurn and Johnston fields – up to an agreed cap – as part of a $120 million sale of the assets to Premier Oil.

Premier was further incentivized by the existence of a tax regime that entitles businesses undertaking decommissioning projects to tax relief of up to 50% - or 75% for older fields – on historic tax losses. In a statement to the London Stock Exchange, Premier said these two assets came with about £250 million ($355 million) in historic tax payments to be recouped upon future decommissioning expenditure.

The M&A manager referred to earlier believes the North Sea could see more deals of the type in which a buyer takes responsibility for decommissioning over and above a certain cap.

Deferring costs will help smaller buyers

In Anasuria’s case, the deal was structured in such a way that the buyers – Malaysia’s Hibiscus Petroleum Berhad and Ping Petroleum, trading in a 50:50 joint venture under the name Anasuria Operating Company (AOC) – will begin to pay for decommissioning only after they have had time to generate cash flow.

Depending on the level of profits made through the assets, AOC will pay between $6.50 per barrel to $12/bbl into a decommissioning trust fund, commencing 18 months from completion of the deal. It will pay an additional $0.15/bbl into to the fund for barrels sold at an oil price of more than $75/bbl from 2018-2021.

The decommissioning liability for the Anasuria cluster is estimated at $180 million and is passed on to the JV partners on completion of the sale.

AOC Chief Executive Phil Oldham said the government had provided positive feedback and suggested the deal’s structure could provide a “way forward for commercial transactions in the UK in the future”.

But Nathan Piper, oil analyst at RBC Capital, told Upstream Intelligence that these types of deals still contain potential pitfalls. For instance, if a seller takes on the responsibility for decommissioning, what happens if at the end of life the state of the equipment operating the field – now the responsibility of the buyer - is so poor that it requires a major investment to renew in order to be able to plug the well? The expectation is that the buyer will make greater investment in upgraded production facilities, infill drilling or tie-backs of satellite fields, but there is no guarantee.

Norman Wisely, partner at legal firm CMS, said in a note to clients that one of the approaches in recent deals has been to sell an asset and then re-transfer it back to the seller at the time of decommissioning, either by outright selling or leasing it back to the original owner.

Other sources say M&A activity in oil is likely to move at a faster pace than gas because oil prices are slowly recovering whereas gas prices remain static.

Piper noted: “It may still take months before we start to see more deals. If you look back at 2008-09, it took about nine months of sustained higher oil prices before M&A activity really picked up.”

By Vanya Dragomanovich