Private Equity Investment Alters the UK North Sea Oil and Gas Industry

Private equity investment has been changing the face of the investment landscape in the UK’s North Sea oil and gas industry. As global oil and gas majors begin to look elsewhere for investment priorities, an increasing number of private equity buyers are stepping in and looking at new ways to bring developments on stream or to squeeze more life out of existing oil and gas fields in the region. 

More than $12 billion in private equity investment has flowed into the sector over the past couple of years, with analysts at the Wood Mackenzie consultancy forecasting a further $13 billion to be deployed. Global oil and gas exploration and production company Nobel Upstream has ongoing interests in the North Sea, with a 7.6 percent stake acquired from Shell in the Maclure field in 2016, and successful appraisal of the Ballindalloch field leading to ongoing development and first production from the field in July 2019. Nobel Upstream also continue to actively pursue new opportunities in the region, stating that the UK sector still has significant opportunities for investment.

Oil Price Stabilisation and Tax Incentives

The recent stabilisation in the price of oil has helped to drive a new wave of private equity investors in the region. As the valuation gap between buyer investment appetite becomes more closely aligned with seller expectation, transaction success becomes more assured. Deal structuring innovations combine with an increased willingness on the part of the vendor to reflect realistic pricing, making the area more attractive to investors. Tax incentives introduced since 2015 have also helped to incentivise investors. Following the Wood Review in 2014, the UK government scrapped the 50 percent Petroleum Revenue Tax and reduced the Supplementary Charge Tax to 10 percent from 20 percent, in line with the Maximise Economic Recovery (MER) agenda. 

Exploring Private EquityInvestment

Refocus of the Major Companies

The major players in the global oil and gas industry are increasingly looking to explore and develop new resources of hydrocarbons on a global scale, rather than squeezing more life out of mature plays such as the UK Continental Shelf. Pressure to ensure profitability is maintained and shareholder dividend flow is ensured have led to many of the major companies implementing aggressive strategies for divestment of non-core portfolio assets. This portfolio rationalisation, designed to help the major companies cut operating costs and streamline business operations to improve overall profitability, means that there are many assets in mature fields, such as the North Sea, coming up for grabs. Private equity investors, who are better placed to focus on cost optimisation and incremental recovery, are therefore seeing more and more opportunities enter the market as the major players focus more on frontier projects.

Improved Understanding of Private Equity

Oil and Gas UK (OGUK) has contacted leading financial figures in the North Sea region to acquire a better understanding of private equity in order to be better able to keep up with the industry. One of the challenges presented by this “changing of the guard” in terms of financing in the North Sea is the need for existing companies to educate themselves about how private equity works. Oil and gas companies are having to learn more about how private equity-backed companies do business, looking at alternative financing structures and sources of capital. Financing structures are continuing to evolve, particularly with regards to decommissioning, so it is essential that the oil and gas industry has a strong grasp of what this means in terms of inbound investment.

Learn more about what private equity investment is in the PDF attachment to this post.