When oil and gas assets are passed along to the next operator rather than decommissioned prematurely, the industry benefits from greater job retention and improved ultimate hydrocarbon recovery.
There are many well known cases where potential sellers and buyers have been unable to agree terms on how to address decommissioning liabilities, but there are also positive cases where they have been able to agree mutually beneficial terms. Three of those positive cases are outlined here:
1. 2017 Chrysaor $3 Billion acquisition of Shell North Sea assets
Decommissioning costs associated with the portfolio at the time of deal were estimated at $2.9 Billion (2016 terms), with an inflation adjusted future cost of $3.9 Billion. Shell’s retention of $1 Billion of this decommissioning liability enabled a deal with Chrysaor and meant Shell was not left with the full decommissioning cost.
2. 2017 & 2018 EnQuest acquisition of BP Magnus oil field
EnQuest bought 25% and operatorship with zero upfront payment, and $85 Million paid from Magnus future cash flows to BP. Earlier this month, EnQuest exercised their option to buy the remaining 75% interest for $300 Million. BP retained the decommissioning liability in respect of the existing wells and infrastructure for the transaction assets, thereby transforming Magnus into a saleable asset. EnQuest will pay BP additional deferred consideration of 7.5% of BP’s actual decommissioning costs on an after-tax basis. The additional consideration EnQuest will pay is capped at the amount of cumulative positive cash flows received by EnQuest from the transaction assets.
3. 2015 & 2018 Serica Energy acquisition of 18% interest in BP Erskine field
BP retained the decommissioning liability based on the Serica cost estimate up to £174 Million gross (£31 Million net), which was a significant enabler to the deal. Serica is responsible for decommissioning cost above that agreed level. BP took a 5% share in Serica, which it still holds today. The success of this deal helped build Serica into a bigger and stronger buyer and in 2017 & 2018, BP and Total E&P went on to sell their interests in Bruce / Keith / Rhum assets to Serica. BP and Total E&P assume decommissioning costs of existing assets, with Serica contributing 30% of cost net of tax capped at net cash flows.
There are many ways of addressing decommissioning liability, including very large liabilities, when both buyer and seller work together for a commercial solution.
Working together on the sale of oil and gas assets will improve ultimate hydrocarbon recovery, increase jobs and result in more Petroleum Deals In Play.