U.S. markets open in 3 hours 49 minutes
  • S&P Futures

    +0.25 (+0.01%)
  • Dow Futures

    +4.00 (+0.01%)
  • Nasdaq Futures

    -25.00 (-0.18%)
  • Russell 2000 Futures

    +12.40 (+0.57%)
  • Crude Oil

    -0.75 (-1.20%)
  • Gold

    +0.90 (+0.05%)
  • Silver

    +0.14 (+0.54%)

    -0.0035 (-0.29%)
  • 10-Yr Bond

    0.0000 (0.00%)
  • Vix

    +1.07 (+6.19%)

    -0.0014 (-0.10%)

    +0.0940 (+0.09%)

    +995.58 (+1.82%)
  • CMC Crypto 200

    +39.06 (+3.16%)
  • FTSE 100

    +22.31 (+0.33%)
  • Nikkei 225

    -591.83 (-2.03%)

UK North Sea asset sales stall as money goes elsewhere

* Opportunities in other parts of globe more attractive

* Bigger packages have limited number of potential buyers

* U.S. firms see better return on capital from shale

By Claire Milhench

LONDON, Oct 10 (Reuters) - A lack of buyers willing and able to take on ageing oil rigs in Britain's North Sea has stalled deal flow this year, creating a headache for North American firms who are under pressure from shareholders to sell.

Marathon, Conoco and Talisman have all put North Sea assets on the block, but the bigger packages are slow to change hands due to wrangling over decommissioning costs, financing problems for smaller buyers, and the fact that some rigs have very little time left on the clock.

In the first three quarters of 2014 there were only 19 deals in the offshore UK market, compared with 63 for the whole of 2013, according to data from Deloitte.

Just four deals were announced in the third quarter, although large packages continued to come to market including Conoco's 24 percent stake in the Clair oilfield.

"Everyone is cutting costs, cutting capital expenditure, trying to sell down assets at the same time and there is a paucity of buyers," said Stephen Murray, a partner at law firm Herbert Smith Freehills. "The balance between sellers and buyers is out of kilter."

"It's a buyers' market for exploration and development projects," agreed Jon Clark, a partner at Ernst & Young. "They can be relatively choosy."

The smaller, non-operated stakes are still able to find buyers, with Premier selling stakes in three fields to Hungary's MOL in the summer, but the bigger, more complex assets are a problem to get away.

This is partly because previously active buyers with deep pockets, such as the Chinese, have tightened the purse strings.

It is also a reflection of the fact that the North Sea is seen as less attractive when compared with other opportunities around the globe in Mexico, South East Asia and Africa.

"Sellers in the North Sea have to recognise that it is competing for capital with other parts of the world that have some attractive stories at the moment," said Neil Leppard, a director at PWC.

Another stumbling block is that the bigger packages tend to come with an operatorship, limiting the number of buyers. "Some groups simply want a non-operated stake," said Drew Stevenson, head of PWC's UK Oil and Gas Transaction Services team.

For the older assets, pricing and financing decommissioning is still a problem, with transactions failing to complete because parties cannot agree on how this burden will be shared.

Would-be buyers, particularly small independents, tend to look for something that is "decommissioning light" because banks and oil majors want them to stump up large amounts of security to cover abandonment liabilities.

"The market just doesn't have the experience yet of pricing decommissioning costs," said Stevenson. "Depending on which side of the deal table you're on, engineers will have a very different view. Then there is the whole question of how the new investor finances that."


For the oldest assets in their twilight years, a better solution might be to seek a "transition owner" such as an oilfield services company, suggested Philip Whittaker of the Boston Consulting Group.

Firms such as Petrofac and AMEC are developing specialist offerings to take elderly facilities from the late life stage through the decommissioning process.

"Sellers need to take unsellable assets off the table. Anything with less than five years to go before the cessation of production date is not a transactable asset," Whittaker said.

For the rest, a new type of buyer needs to be wooed, such as a refiner or utility company. Some German utilities already have exploration rights in Norway and are interested in growing their E&P presence.

Hungarian refiner MOL first entered the UK North Sea when it purchased Wintershall's non-operated assets late last year, and is keen to acquire more.

"This could be a new type of owner - refiners are used to dealing with a difficult, low margin business, which means running your facilities very efficiently and being cost conscious, which is what these assets need," said Whittaker.

But Spanish energy company Repsol's talks to buy Canadian producer Talisman Energy were said to have hit the buffers due to the unattractive nature of its North Sea assets. Instead it is reportedly more interested in Talisman's Canadian shale plays.

Rising costs and declining production in the North Sea basin are part of the problem, but the ongoing uncertainty around the UK's fiscal review and delays in setting up the new industry regulator have also put the brakes on deal flow.

"We need to get on with things or investors will turn their attention elsewhere," E&Y's Clark said.

It all adds up to a major frustration for North American energy firms being pushed by shareholders to scale back their international exposure and focus on opportunities at home.

For example, Apache, which is the third largest oil producer in the North Sea and has spent billions of dollars upgrading the Forties complex, is under pressure from activist investor Jana Partners to restructure its business.

"Our biggest challenge in the North Sea is competing for capital," said Jim House, managing director, Apache North Sea, speaking at a conference in Aberdeen in the summer.

In July Apache said it had plans to sell or spin off its international properties to focus on drilling higher-margin shale wells in places like the Permian Basin in Texas.

It has denied press reports that it is looking to quit the North Sea, but over the last year it has put a whole range of assets on the block.

"Companies are prioritising - many U.S. firms feel they are getting more value in the market for what they are doing in U.S. unconventionals than they are for their international assets. Why deploy $1 overseas if you get less value than deploying it domestically?" said E&Y's Clark.

(Editing by William Hardy)