Brownfield Interest In The North Sea Remains Strong

BMI View: TAQA's acquisition of BP's assets will extend its position in offshore UK south into the Central North Sea. It also supports our view that despite the North Sea's maturity, its fields remain 'safe' assets to hold on to that can help support TAQA's bottom line as it moves into riskier oil plays. Although investments such as these into brownfield developments will only slow the rate of decline in the UK's upstream production at best, firms in possession of key assets in the North Sea can still expect to benefit from capital-rich players looking to buy into fields in this area given its strategic import ance in global oil prici ng.

Majority state-owned Abu Dhabi National Energy Company (TAQA) has closed in on a deal with British major BP that extends its interests into the Central North Sea. As part of an agreement made in November 2012, TAQA will acquire BP's operating interests in the Harding, Maclure and Morrone fields as well as non-operating interests in other assets in the Central North Sea for US$1.058bn. This excludes payments accruable to BP for changes in oil prices and/or production levels that would affect the value of these assets.

It will also increase its interests in the SAGE gas pipeline, the Forties-Brae and Forties-Braemar oil pipelines as part of this deal. The sale of Devenick to TAQA will be finalised at a later date.

TAQA's Gains: Oil Fields Acquired As Part Of BP Deal
Field Type Details Stake Operatorship Last Known Production Rate (b/d)* Monthly Associated Gas Production (MMcm/d)
* As of Feb 2013 for all; Jan 2013 for Devenick. Source: BP, DECC
Brae Oil Includes South, Central, North and West Brae fields 27.70% No 17,009 1.176
East Brae Oil N.A. 33.21% No 902 1.624
Braemar Oil Tie-back to East Brae 52.00% No 1,507 0.728
Maclure Oil N.A. 37.04% Yes 0 0
Harding Oil Peaked at 14,252b/d in Nov 2012 before falling 70.00% Yes 7,892 0.196
Morrone Oil Development plan could be in place N.A. Yes N.A. N.A.
Devenick Oil Tie-back to East Brae. Yet to be finalised 88.70% Yes 4,595 2.128

The Abu Dhabi firm is already a large player in the UK North Sea. It possess key assets in the northern areas of the North Sea, including an operating interest in the Brent system oil pipeline and equity interests in key fields that contribute to the Brent blend that serves as the global crude oil benchmark. Its acquisitions from BP will extend its presence into the Central North Sea, proving TAQA's commitment to offshore UK despite the maturity of fields in these waters.

TAQA's latest acquisitions are f ields which output levels have passed their heyday . Harding, in particu lar, may be highlighted as a 'quality' asset by BP , but production from the field appeared to have peaked at 14,754 barrels per day (b/d) in January 2001. The l atest available data from the UK Department of Climate Change and Energy (DECC) shows output at 7,892b/d in February 2013. Indeed, BP had admitted that 'significant investment and resources' are needed to develop gas resources at the field.

Nonetheless, these fields in the North Sea remain 'safe' assets compared to frontier plays that could hold greater resource potential but pose greater exploration and production risks. For one, despite the relatively high level of taxation at about 62% of total income in the UK, it has a stable operating environment that is well-supported by oilfield services (OFS). In addition, an eagerness to support domestic oil and particularly gas production has seen the current coalition government offer fiscal incentives to encourage investment. This makes the UK a safe play that can help provide a firm with a steady stream of revenue.

As TAQA moves into less explored assets worldwide, UK assets could act as a buffer in the interim. Moreover, taking on operatorship of already-developed fields allows TAQA to build on exp eriences from predecessors to speed up its own learning of field development and production in preparation for more high-risk projects elsewhere. A notable venture it had entered into is in Iraqi Kurdistan, having taken a 53.2% operating intere st in the Atrush block - a 'pure expl oration play', according to the company. As stated in its company statement, experiences in the North Sea offer a 'platform for growth' in the Middle East.

More For The UK North Sea

TAQA has not been the only big name buyer interested in the UK North Sea. Japanese firm Mitsui & Co . took BP's equity interest in the Alba and Britannia fields in 2012. The same year also saw Chinese national oil company (NOC) Sinopec move into the North Sea , following a US$1.5bn purchase for 49% of Talisman 's offshore UK assets via its subsidiary Addax Petroleum . Addax could take more North Sea fields, as chief executive Yi Zhang disclosed in a May 2013 interview that it has 'several targets' in mind.

Acquisitions such as these are buoying hopes for a revival of the UK North Sea. Industry body Oil & Gas UK expects investment in the UK North Sea to continue climbing upwards in 2013. However, these investments by capital-rich companies are mostly in projects that are already in development stages. While further investments into brownfield projects could stem the rate of decline in the UK's oil and gas production, the country requires more exploration programmes to uncover new resources, and in large quantities, to replace resources that are depleted. This underpins our outlook for the UK's upstream segment. Although we had adjusted the rate of decline in the UK's production, we still maintain the downward trend in both output and reserves.

Investment Helps To Slow Output Decline
UK Oil (LHS, '000b/d) & Gas Production (RHS, bcm), 2012-2022

Nonetheless, t his interest in safe and producing assets is likely to benefit firms looking to divest their interests from relatively large fields in the North Sea. BP has in fact been one such beneficiary given its advantageous position offshore UK. The large sums of cash that Asian or Middle Eastern firms have been willing to fork for prized assets have allowed the British major to meet some of its US$38mn divestment target to pay for its liabilities in the 2010 Macondo Spill.

Interestingly, most of these large acquisitions are for oil-focused projects rather than gas ones. This is a trend that is likely to continue given t he strategic appeal of possessing oil fie lds which output could directly affect the prices of Brent . This could in turn allow firms in control of these fields to gain insider knowledge of the direction in which Brent will trend towards , to the benefit of their wider operations.

This article is tagged to:
Sector: Oil & Gas
Geography: United Kingdom

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