THE outlook for investment in new North Sea developments is uncertain in the wake of the furore about the giant Cambo oil field off Shetland but assets in the area will remain in demand, experts have said.
Specialists at accountancy giants reckon Shell’s decision to drop plans to develop Cambo highlights the added complications that now face potential investors following the months of oil and gas price volatility triggered by the pandemic.
Companies have spent years dealing with difficult trading conditions in the North Sea. However, the Cambo saga has made clear that they now have to place much greater emphasis on Environment Social and Governance (ESG) considerations in decision-making processes that long focused on relatively clear cut commercial questions.
“The addition of the climate thing makes it far more difficult for investors, including some seasoned investors like Shell because of social pressure, some well-informed some less so, on the impact of climate change,” said Martin Findlay Aberdeen lead partner for KPMG.
Drew Stevenson, who heads PwC’s Energy & Utilities group, said climate and related considerations are making decisions about whether to invest in developments more sensitive than ever.
“The ESG dimension is very much more part of that decision-making process than it would have been,” he said.
Against that backdrop there is concern that the prospect of any firms deciding to develop big new fields is remote, while exploration activity may remain under pressure.
However, demand for oil and gas is likely to remain strong. Supporters of the North Sea industry reckon it has an important role to play in helping the UK to reduce imports, which could entail higher emissions than domestic production.
Derek Leith, EY’s Global Head of Tax for Oil and Gas said: “The scrutiny of the Cambo development and the delay in its sanction will have unsettled some North Sea investors. The uncomfortable truth is that the demand for fossil fuels is unabated, and the policy debate has to focus on how we can address the demand ... whilst at the same time decarbonising the production process.”
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The onus is on the Government and the regulator, the Oil and Gas Authority, to ensure that sufficiently rigorous standards are applied in the North Sea to make the basin a global leader in environmental terms.
“If I was an investor I would want to ensure my investment was a green as possible,” noted Mr Findlay.
He added “The OGA has a key role to play in terms of selling the attractiveness of the basin to investors and making sure that it is well known that there is a clear ESG metric being applied. It could provide a degree of assurance to people choosing between the North Sea and other areas.”
Shaun Reynolds, Aberdeen office senior partner at Deloitte, noted investment levels have been on a downward trend over the past few years and a surge in activity is unlikely.
However, he added: “A number of projects have been deferred in 2021 due to COVID-related challenges that are likely to start in 2022 and reverse this trend temporarily.”
Firms can generate big profits on North Sea production at current prices. That means uncertainty about the investment outlook may not frighten off potential buyers of existing North Sea assets, amid a shake-up in the area that was given fresh impetus by the fallout from the pandemic.
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“Oil prices are currently strong and we are also seeing a lot of interest from smaller and mostly private equity-backed companies that are interested in good quality assets and cash flow yield,” said Mr Reynolds.
Noting that private equity-backed North Sea players have been expanding, he added: “We believe that these companies will continue to expand their portfolios if they see the right opportunity come to the market.”
PwC’s Mr Stevenson said ESG considerations and uncertainty around the investment landscape meant deal activity was unlikely to hit the levels seen following the downturn that started in 2014, when there were “a bunch of private equity investors and funds that were buyers”.
However, deals will happen for the right assets. He reckons the North Sea is an attractive place for people to look for gas production, which is “very much on message” in terms of the transition to a lower carbon energy system.
The Kistos business led by veteran North Sea dealmaker Andrew Austin said recently that it is participating in an auction of West of Shetland gas assets launched by France's TotalEnergies.
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Mairi Massey, a tax specialist at PwC, said some firms might be keen to buy assets to make use of reliefs they have accumulated. Late-life production could be in demand among firms that have expertise in decommissioning.
Mr Findlay at KPMG predicted: “There are investors who will spot opportunities at current asset prices.”
He said conditions will remain tough for some firms in the supply chain given the uncertainty about new developments and exploration.
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Mr Stevenson said the energy transition could create significant opportunities in terms of workloads and jobs, which it may require huge amounts of capital and re-skilling work to unlock.
However, Mr Findlay cautioned: “The supply chain knows it needs to transition but it’s quite hard for some to develop strategies as there are so many uncertainties out there.”
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