How continued investment into North Sea E&P plays a crucial part in advancing the energy transition
Published: 20th September 2022
by David Stent, Content Editor, Energy Council
The energy transition has entered a period of worrying uncertainty, wherein colliding geopolitical and supply pressures have rapidly unraveled the advances made by European states in lowering their emissions. As Europe’s energy supplies and storage waver, the conversation has shifted toward sourcing a diversity of oil and gas that will underpin long-term energy security without engaging with pariah state actors.
As European states continue to explore their options to secure a greater diversity of energy away from Russia, what is available to them – within the context of the energy transition – is slim. With that in mind, the North Sea’s oil and gas producers do stand alone as the most progressive players when it comes to engaging on their energy transition commitments.
With consumer prices reaching unsustainable levels for a prolonged period, while the climate shifts continue on their downward spiral – the Energy Council examines how continued investment into North Sea E&P can play a crucial role in advancing the energy transition.
M&A – plentiful opportunities to pursue
For a basin that had lost popularity and position at times over the past decade, the resurgence of E&P actors pursuing deals in the North Sea has risen sharply over the last 2 years. In this sense, it has been an opportune environment for M&A activity, assets were often picked up on discounts at the bottom of the Covid slump, and carried through until the beneficial time to sell in a subsequent high-price market. Naturally, pricing and picking out assets has the difficulties of finding common ground – yet the capital available to expand oil and gas production is currently far more accessible than in recent years.
Aker BP & Lundin Energy
Lundin Energy was an early leader in electrifying their Norwegian Continental Shelf North Sea assets and pursuing innovative areas to reduce their emissions impacts. The approach here placed the Swedish-headquartered company as a global pioneer in defining the future of oil and gas production. For their efforts, the Aker Energy and bp joint venture – Aker BP – offered a total acquisition worth $14 billion, including $2.2 billion in cash and 271,910,019 Aker BP shares for each Lundin share.
Lundin’s portfolio of high quality, low-emissions assets and synergies, came at a premium but are worth every penny as energy transition positioning becomes increasingly valuable.
EIG Global Energy Partners & Harbour Energy
Global private equity giant, EIG Global Energy Partners, envisioned the rise of the North Sea earlier than many peers did by establishing Harbour Energy as an investment vehicle in 2014 to take control of ‘conventional, cash generative, producing assets outside of North America’. By 2019, Harbour had backed Chrysaor Holdings to acquire Shell’s UKCS assets for $3 billion and Conoco’s for $2.7 billion. Then last year, an all-share merger with Premier Oil and Chrysaor saw the establishment of Harbour Energy as an independent E&P producer.
Now, in a seller’s market, Harbour has sought to distribute shares to fund investors in order to dilute their exposure to increased taxes and a wavering oil price.
BlueWater-Blackstone & Siccar Point
Siccar Point was an E&P company launched in 2014 by a BlueWater Energy and Blackstone consortium, with a long-term vision for the North Sea in-mind – investing a tidy $550 million initially into the project. Yet, as in typically the case with private equity ventures, when Ithaca Energy proposed a $1.1 billion deal (with $360 million additional payments), the return on capital was too good to turn down.
Decarbonisation, the driving force behind investor decisions
Naturally, the opportunity to access the most beneficial dividends from the basin in years. Yet behind these capital deployments lies the belief that European ESG demands can be aligned with continued oil and gas production – if done in the North Sea. As such, investors are actively backing deals that reflect a commitment to low-carbon supply channels.
Institutional capital has placed stringent targets for financiers, investors and energy companies alike to show commitments to decarbonisation efforts, or risk being left out in the cold. Divestures from highly exposed assets in less ‘concerned’ regions such as Asia and Africa – reflect this trend.
North Sea producers have created robust arguments for continued investment by developing an integrated plan that accounts for present and future demands. These plans most often include; digitalisation of assets to create exceptional efficiencies in the supply chain, renewable-sourced electrification of rigs, and carbon capture, utilisation and storage (CCUS).
As the deal with Aker Energy, bp and Lundin Energy exhibited – a business that has taken steps to integrate a range of low-carbon initiatives becomes an attractive proposition for buyers looking at longer-term positions, and places an exceptional premium for sellers.
In a similar manner, the Ithaca purchase of Siccar Point from BlueWater Energy – initially viewed as a medium-to-long term project, was sold after two years as the asset development and integration with low-carbon initiatives added outstanding value in the short-term.
Those companies, who have been actively engaging in the energy transition responsibilities and requirements, are the companies whose assets will prove most valuable on the market. Conversely, those who have not sourced the capital for those upgrades will have far less leverage at the negotiating table.
Policy initiatives supporting North Sea prosperity
Between Denmark, Norway and the UK, each have constructed robust, forward-thinking policy initiatives to guide companies operating in the North Sea to achieve the 1.5°C and net-zero goals. And, while companies should be more progressive than the slow pace of policy development, these guidelines act as a strong framework to push forward a timely reconsideration of how we produce energy.
The REPowerEU is the European Commission’s roadmap to wean off Russian energy supplies by 2030 or earlier – a difficult but long-overdue necessity. Naturally, this will involve a sharp uptake in renewable development, but as the need for oil and gas remains, the renewable-based electrification of rigs in the North Sea becomes even more critical to maintain energy transition goals. As such, the EU will be encouraging greater investment into the basin to secure the vast energy requirements of the regional bloc.
Similarly, the United Kingdom’s North Sea Transition Authority was established to guide the nation’s objectives in energy security and energy transition alike. The regulator has established robust frameworks to encourage new and lasting investment, decommissioning requirements, use of technologies, and broader supply chain decarbonisation – including the use of CCUS.
Initial projections show that Norway’s Continental Shelf will receive $87 billion in investments between 2022 and 2025, while the UK Continental Shelf will receive a further $30 billion. The next three years are set to be a defining moment for European energy security and will set the tone for how E&P companies approach decarbonising their supply chains.
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