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North Sea oil: new owners for twilight years raise questions of national interest

North Sea oil rig at sunset
Changes in the pipeline. Arild Lilleboe

The changing of the guard in the UK North Sea has reached a symbolic turning point. The reverse takeover deal between Chrysaor and Premier Oil overhauls BP to create a new number-one oil and gas operator, producing some 270,000 barrels of oil equivalent per day. Significantly, the new entity is controlled by private equity.

The deal marks a new era in the North Sea in which private equity groups and national oil companies are steadily replacing the old oil majors to dominate the UK’s oil and gas resources. Chrysaor’s rise highlights this shift. Backed by Harbour Energy, an energy investment vehicle formed by Washington-based private equity firm EIG Global Energy Partners, it has grown rapidly by spending billions of pounds buying oil and gas fields formerly owned by Royal Dutch Shell and ConocoPhillips.

Chrysaor logo
The new number one. Chrysaor

The shift in ownership offshore is influenced by UK government policy, which seeks to attract investment into the North Sea to boost production from a declining basin. But the scale of the ownership revolution has received little comment and has arguably been hastened by the pandemic. So what does it mean for UK oil and gas production to be less tied to the strategies of the traditional oil majors? And what are the consequences for an industry that employs over 250,000 people and still provides a large proportion of fuel and electricity (via gas) to the UK?

Oil and COVID-19

The short-term effects of COVID-19 for this sector have been severe. COVID-19 crashed demand for petrol and aviation fuel in the UK and around the world.

The international oil price plummeted, and at around US$40 a barrel it remains well down on the US$60-US$70 range that preceded the pandemic. Shell cut its dividend for the first time since the second world war and reported an US$18 billion loss in its second-quarter results, while BP declared it would write off up to US$17.5 billion of its assets.

In the space of a few months, COVID-19 has crystallised questions about the future price of oil in a warming world, and the implications for oil and gas producers of sustained downturns in demand. COVID-19, it seems, has ushered in a new period of transformation for global oil, in which the future of the UK’s North Sea hangs in the balance.

The new guard

Yet focusing on the pandemic obscures the wider North Sea transformation over the past decade. With majors like Shell, BP, Chevron and Exxon no longer owning everything from rigs to pipelines to refineries, the effects of COVID-19 are playing out against a very different industry to that which dominated for decades.

Research by our team explores the shift in ownership as part of the evolving relationship between international oil firms and the UK. BP and Shell, two of the pioneers of UK North Sea petroleum in the 1960s and 1970s, now account for less than a fifth of total oil production.

In all, the majors have sold around £20 billion in UK assets in the past three years, with more likely to come. In general, they have decided to concentrate on more profitable plays elsewhere. Ironically, the Chrysaor/Premier Oil deal put paid to a deal in which Premier would have bought some of BP’s North Sea assets, but the direction of travel is clear enough.

After Chrysaor/Premier Oil, BP and Shell, the next most significant oil player is now CNOOC (Chinese National Offshore Oil Company). Owned by the Chinese state, CNOOC entered the UK through its US$15 billion acquisition of Canadian company Nexen in 2012. This advance has been mirrored by other state entities including TAQA (otherwise known as the Abu Dhabi National Energy Company) and Dana Petroleum (since 2010, a wholly owned subsidiary of the Korea National Oil Company).

The fact that BP and Shell are only involved in 11 of the 133 bids for acreage in the 32nd North Sea licensing round is also very telling. Most awards will go to relative minnows, many of them controlled by private equity companies that tend to seek quick returns to pay down high levels of debt.

There is very little discussion of whether this new North Sea ownership is in the national interest. The UK government has tended to think in terms of maximising oil and gas production and protecting jobs. The new owners are very much part of the deal because they bring investment, hire workers and support the supply chain (contrast this with the American furore that made it impossible for CNOOC to buy oil group Unocal for $18.5 billion in 2005).

BP lorry driving away
In retreat: BP and Shell. Jevanto Productions

Nonetheless, the new arrivals are creating a sector that is different in significant ways. They are focused almost exclusively on extracting oil and gas, and have neither the broad footprint nor long-term reciprocal relationships between firm and state that developed (for better or worse) around companies like Shell and BP when they oversaw the entire petroleum production chain. There are signs that the relationship is becoming more transactional, centred on offshore access rather than issues like supplying fuel to the nation or providing the underpinning infrastructure.

The concern is less a narrow “national” one about whether international or UK owners exploit the North Sea than about the emerging economic model through which the UK is trying to prolong production. This increasingly rests on new entrants, many of whom do not own downstream assets in the UK such as refineries, are not subject to the disclosure requirements of publicly listed companies, and prioritise quick returns from offshore production.

The UK government’s laissez-faire attitude to ownership in an effort to maximise production has attracted a new set of firms to the UK and transformed the structure of the sector in the process. The economic model for the North Sea’s twilight years is becoming clear, and it is one in which private equity and foreign state-owned firms increasingly call the shots. Recent changes in ownership in the North Sea deserve more scrutiny and are of national interest, as they will determine who reaps the benefits and who bears the costs of the basin’s long-term decline.

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