The ageing oil and gas network of the UK North Sea is seeing a welcome rise in interest from infrastructure specialists and pension funds, giving oil majors a chance to offload unwanted assets and ultimately improve recovery from mature fields. Britain’s North Sea infrastructure has developed in an ad hoc fashion over the years, and still tends to be owned and operated by the original producers.
Now, with their own output on the decline, oil and gas majors are unwillingly turning into service providers for smaller producers who need access to these pipelines and platforms to get their output to shore. But oil majors want to reduce their stakes in these non-core assets to free up capital for use elsewhere. This provides an opportunity for independent midstream owner-operators, pension funds and infrastructure funds to step in.
To date, there have been just a handful of transactions in the UK midstream sector – most recently June’s sale by BG Group of its majority stake in the CATS gas pipeline to France’s Antin Infrastructure Partners. This follows the 2012 sale of the Teesside Gas Processing Plant (TGPP) to North Sea Midstream Partners (NSMP), which is backed by ArcLight Capital Partners, a private equity firm focused on energy infrastructure.
Such transactions have been more common in the Norwegian and Dutch sectors, but industry experts say there is no structural reason why more deals cannot occur in the UK basin. Andy Heppel, chief executive of NSMP, said the firm is keen to grow by targeting acquisitions across the infrastructure spectrum, including oil and gas pipelines, onshore processing/stabilisation plants and terminals.
“We are also thinking about new gathering platforms we could invest in on behalf of a number of smaller fields, which on their own couldn’t fund and invest in the required infrastructure,” he said.
Attracting midstream players to Britain’s North Sea was one of the tasks Sir Ian Wood set for the new industry regulator in his strategic review of the offshore oil and gas sector. Wood pointed out that existing hub owners typically view the provision of processing and transportation services to third parties as a low value activity. There is little incentive for them to take on business which could ask risks to their own operations and use up capacity in their facilities, he said.
By contrast, independent midstream specialists don’t have distractions or alternative uses for their capital or people. As a result, they can focus on investing in the infrastructure and enhancing the services provided, Heppel said.
“Consistent with the Wood Review, we believe we can encourage the development of the substantial remaining reserves in the UK basin in a quicker, more transparent and customer-focused fashion, without the distraction of an upstream position,” he said.
“An open network can create massive value because ownership of the network is no longer a blocker,” agreed Philip Whittaker at the Boston Consulting Group (BCG). “An oil company really competes on reservoir drilling and geoscience. Midstream is often an inconvenience.”
NEED TO UNBUNDLE
Pension funds and infrastructure funds are also taking an interest in non-operating stakes. Antin’s purchase follows investments by Dutch pension fund PGGM and Pension Danmark in Dutch gas pipeline networks Nogat and NGT in 2013. Infrastructure appeals to pension funds because of the stable, inflation-linked returns. At the time of its purchase, Pension Danmark said it expected to invest a further 1.21 billion euros in infrastructure over the next four years, the majority of which would be in the energy sector.
However, if this ownership model is to gain traction, sellers will have to unbundle infrastructure stakes from reserves, allowing buyers to target the assets they want. Talisman, Shell and Marathon all have North Sea assets on the block, but buyers are getting picky. In June, Marathon failed to sell its Brae facilities, saying it had received no “acceptable offer”.
“They didn’t budge on the price as they are not a distressed seller and they didn’t desperately need the cash,” said Sam Wahab, an oil and gas analyst at Cantor Fitzgerald Europe. “We believe they probably need to split the assets up and then sell to various independent companies.”
Traditionally, producers have packaged sale assets together, so buyers wanting access to reserves might also have to take on platforms, pipelines and a share in a processing terminal, whether they want them or not. And whilst there is likely to be plenty of interest in pipeline stakes, the more dilapidated platforms in the North Sea present bigger challenges. There is already a restricted pool of buyers for these assets and industry experts say asking prices must fall if oil majors expect to offload older rigs.
“The seller has to have realistic expectations about the price that can be achieved,” said Erin Moffat, an analyst in the UK upstream research team at Wood Mackenzie.
Neil McCulloch, president of the North Sea business at EnQuest, which specialises in extracting value from mature assets, added that some ageing assets don’t offer sufficient value for a buyer.
“There has to be a sensible attitude by the seller as to what they expect … they have to be realistic about the depreciation. If they’ve enjoyed all the proceeds from the original reserves why would people take all the liability for getting rid of the infrastructure?”