There are deals brewing in the North Sea. E&P companies
merging and acquiring one another usually grab the headlines, and
sit front of mind against the backdrop of a low oil price
environment. But take a further look across the industry and we
should see a notable number of transactions in the midstream sector
– specifically infrastructure.
Until recently, it's been an area of the market paid little
attention – infrastructure tends to be like that.
Historically, big oil and gas operators developed and owned what
they needed, transporting their oil discoveries through proprietary
pipelines and refining it in their own processing plants.
That's largely remained the case, save for the last two or
three years. In that time, the UK Continental Shelf (UKCS) has
evolved and the model has changed with it, driven by two principal
pressures: the basin's age and the oil price decline of the
past 24 months.
The first makes the North Sea high-cost, which has seen many of
the majors look to divest and focus on other regions of the world.
The second has forced many companies to reassess their portfolio of
assets and consider rationalisation. Many have dividends to protect
and, despite the challenges presented by the commodity price, only
ConocoPhillips has had to cut its payments to shareholders so
Infrastructure, meanwhile, is often considered to be ancillary
for oil producers, it is less complex to value than oil and gas
reserves and there's a ready market at the right price. No
surprise then that infrastructure has become the go-to asset for
The likely buyers? Private equity and energy-focussed funds.
Just look to BP's Ł324 million sale of the Central Area
Transmission System (CATS) to Antin Infrastructure Partners as an
example. Antin had bought BG Group out of its stake the previous
year, giving it near-complete ownership of the asset.
Such transactions aren't new, but they are relatively novel
for the North Sea. The third party ownership model has been
employed successfully in the US shale gas market for years, while
oil and gas infrastructure in The Netherlands and Norway is
commonly owned by private equity or pension funds.
PE houses are doing this with a view to providing focussed
management of the asset, making it more efficient and cutting
costs. They'll do this with the aim of creating a portfolio of
infrastructure, developing the assets over the course of a decade
and ultimately selling the collection on to a new owner –
most likely to be a pension fund looking for a steady, reliable and
diversified source of income.
What does this mean for the North Sea? Well, in short, it is a
positive step for everyone. PE has a reputation for short termism
– but that's not the case in the kind of players looking
at the UKCS. These are more like energy funds, with technical
expertise, a solid understanding of, and commitment to, the
Their involvement will see infrastructure placed in the hands of
owners who will be wholly focussed on it and seek to make the most
of the asset's potential. That can only be a positive step from
a longevity perspective.
Secondly, it will mean more infrastructure is kept operational
for longer. There's been much talk of how to make the most of
the remaining 20 billion barrels of oil still sitting at the bottom
of the North Sea – infrastructure assets will be critical to
extracting that. In fact, new infrastructure could even be laid to
connect existing assets and drive further value from them.
Finally, the shift towards new ownership will inevitably bring
about consolidation, with more midstream funds entering the market.
Investment will focus around some key infrastructure and provide
some much-needed funds for improvements.
There's a strong appetite out there for North Sea
infrastructure – but only at the right price. Energy focused
infrastructure funds will be a likely source of investment and, as
the oil price continues to take its toll and more operators are
forced to divest non-core assets, deals will be done. It could be
just what the industry needs.
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An assignment of rights under a contract is normally restricted to the benefit of the contract. Where a party wishes to transfer both the benefit and burden of the contract this generally needs to be done by way of a novation.
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