Jeremy Beckman
Editor, Europe
After a long quiet period for North Sea asset deals, the market has ignited this year. BP, Shell, ExxonMobil, and ENGIE have agreed to sell wide-ranging production interests, not solely in mature fields, offshore the UK and Norway. The buyers are mostly small to mid-range companies managed by industry old hands, supported by private equity.
One exception is the London-based INEOS Group, established 20 years ago and now one of the world’s leading manufacturers of petrochemicals, specialty chemicals and oil products with annual turnover of around $40 billion and 105 manufacturing sites worldwide. The privately-owned company, led by chairman and controlling shareholder Jim Ratcliffe, had diversified into North Sea gas field production in October 2015 when it acquired interests in 12 UK fields held by Germany’s DEA and Fairfield Energy, all close to INEOS chemical plants in northeast England. The main producing fields were Breagh and Clipper South.
Earlier this year, the company announced two further deals that would shift it several positions up the North Sea E&P hierarchy. The first, valued at $250 million, concerned a transfer of ownership and operation from BP of the 235-mi (378-km) Forties Pipeline System (FPS) and associated pipelines and facilities in the UK central North Sea. BP built the FPS in the mid-1970s to transport oil from the Forties field to a refinery in Grangemouth, central Scotland. Today the system handles liquids and gas production from 85 UK and Norwegian fields close to the pipeline route, with oil throughput last year averaging 445,000 b/d (the capacity is 575,000 b/d). In 2005, BP sold Grangemouth and related chemical plants to INEOS. Under the current transaction, INEOS will also assume ownership of the associated Dalmeny oil export terminal; the Kinneil terminal and plant that receives and processes the FPS gas; the Forties Unity (riser) platform; and other associated offshore and onshore infrastructure.
Soon after the BP announcement, INEOS reached an agreement to acquire Copenhagen-based DONG Energy’s North Sea area oil and gas business for up to $1.30 billion. The portfolio comprises around 570 MMboe of proven and potential oil and gas reserves, with production of around 100,000 boe/d last year. The assets include interests in two of northwest Europe’s major offshore gas/condensate field developments, Ormen Lange in the Norwegian Sea and Laggan-Tormore west of Shetland.
According to Geir Tuft, CEO of the newly established INEOS Oil & Gas division, the company will finance both acquisitions via a combination of cash reserves and debt financing.Offshorespoke to him about the company’s plans for its growing North Sea business.
Offshore: The new organization is a step-change forward from the previous INEOS Breagh division, which you also oversaw. Can you explain how the new management structure will operate?
Tuft: We have established INEOS Oil & Gas as an organization to manage Breagh, Clipper, and the assets we expect to acquire from DONG E&P during the current quarter, assuming approvals from the national regulators of Denmark, Norway and the UK, and compliance with the EU’s competition process. A senior team of three reports to myself as CEO of the new division on issues such as structure, finance, and merger and acquisition activity. Other individuals will retain their current roles as heads of specialist technical departments such as subsurface engineering.
Forties is more of a midstream business which will be renamed INEOS FPS, under the stewardship of Andrew Gardner as CEO. Although the business has strong links to the North Sea, with various major oil companies exporting their production through the Forties Pipeline System, it also connects physically to the chemicals and refinery assets we own in Scotland. Our ambition is to complete this transaction during the third quarter following regulatory approvals from the Oil & Gas Authority and clearance for our safety case process from the UK Health & Safety Executive.
Offshore: INEOS is a global organization, so did the company have specific reasons for making its first upstream acquisitions in Northwest Europe?
Tuft: We looked at opportunities in Europe and the US, but the US is a much more difficult environment for doing attractive upstream deals. The UK North Sea is clearly a mature basin, with most of the major players responsible for the initial field developments increasingly refocusing on less mature parts of the world where they can apply their capabilities in, for instance, deepwater or very complex large-scale integrated projects.
There are a lot of incumbent independents in the North Sea with the ability to run late-life assets, but there is also a need for new companies to do this in a different way. That was the biggest driver for INEOS starting initially with UK upstream deals. Over the years the company has developed strengths in the chemicals sector, acquiring assets and running them hard, as this is a cyclical business and costs need to be lower to protect margins. The process typically involves debottlenecking - a great example of a similar approach in the North Sea is what Apache has achieved at the Forties field over the past decade or more, via progressive infill drilling.
Offshore: Other recent upstream transactions in the UK and Norway have been driven in part by optimism that the worst for the North Sea industry is over and that the oil price will finally recover. Did these considerations influence INEOS?
Tuft: Our view is that the price will be low for longer - we don’t see it ramping back up to $100/bbl. We had viewed North Sea oil and gas as an opportunity because the assets are typically late-life and we have a good track record managing these, regardless of the oil price. But the fact that the price had dropped lowered the value of some of the assets, hence the entry ticket was easier.
Commodity prices are changing. There had been a two-and-a-half year hiatus in the North Sea with hardly any deals - it’s not that people weren’t willing to sell, but they hadn’t realized how creative they needed to be with these assets in order to make acquisitions happen. The buyers that have pulled off deals range from small private equity-backed companies to larger companies such as ours. There have also been elements of creativity that have helped move some of the transactions forward, such as the seller (developer) agreeing to retain decommissioning liability for the asset, and deferred and/or contingent payments, i.e. loans from the seller to the buyer.
The UK basin has been developed in phases. Initially there is thought to have been 60 Bboe recoverable of which the first 40 Bboe have been extracted, effectively developed in 40 bundles of up to 1 Bboe, and these are fields that are typically more challenging to develop in terms of water depth and the length of wells that have to be drilled. Thankfully, due to the combined efforts of operators, the supply chain and technical innovation, costs have come down a bit, so the climate for investment has changed. However, when you look at how the industry in the US has approached the challenge of developing shale, the cost of drilling those wells has come down year-on-year, with attendant process efficiency improvements. The same has to happen in the UK North Sea to get the remaining 20 Bboe out. We think that will happen, which is why we are investing in the UK.
Offshore: When weighing up potential acquisitions, has the priority for INEOS been producing fields with a reasonable shelf life, rather than tail-end production from old facilities?
Tuft: As a buyer, you have to accept a bit of both to do the deals that are available. The portfolios we have acquired contain a mix of mature fields and promising discoveries - the developed fields hopefully have eight to 12 productive years ahead, giving us room to take out costs and run the facilities as well as we can. As for how we run them, we are not prescriptive in our approach, it’s more a case of, ‘can we create value with the tools we deploy?’ Other newcomers to the North Sea have looked where possible to outsource offshore operations management - That is something we as a rule would not do. Key to our success in chemicals has been to retain control over the key aspects of resources that drive safety, reliability and cost of our assets.
Offshore: The DONG upstream package ranges from producing fields to stakes in potentially high-cost, harsh environment field developments. Is the company considering selling some components that might not fit with its strategy?
Tuft: Over the last decade INEOS has completed more than 50 transactions, but I can count on one hand the number of businesses we’ve sold over the same period. There are no plans to divest any of the assets we’re acquiring - we are long-term investors with an overriding goal of creating value.
Offshore:Is the company looking to participate in future offshore licensing rounds in the UK, Norway, and Denmark with a view to building exploration acreage close to its various production centers?
Tuft: We applied for and were awarded license shares under the UK’s 28th Offshore Licensing Round. We passed on the 29th Round because of its focus on frontier acreage, but we are interested to see what’s on offer in the upcoming 30th Round. And we are constantly evaluating acquisition opportunities in areas where we have detailed subsurface knowledge. DONG also gives us entry to a new exploration area, west of Shetland, in addition to a share of production from the Laggan-Tormore and Glenlivet fields.
Offshore: Since the company acquired Breagh/Clipper South from Letter One, has it introduced changes to the way the facilities are run?
Tuft: There were a few managerial changes, with the German ex-pats returning home to Hamburg, and one or two retirements. We brought in a few people from INEOS, including myself as head of the business, but the core expertise in subsurface and drilling has been retained.
Each time we acquire a company we follow a clear process of due diligence for each asset at each level - the DONG package will be no different - and there are a few procedures we introduce early on, related to, for instance, safety management and reporting and emergency response. And over the first six to 12 months we perform an organizational review, to determine whether the resources are in place and whether the organization is staffed correctly to meet the needs of the next three to five years. One advantage of being a privately-owned company with only a few shareholders - as opposed to a large listed oil company with many shareholders - is our ability to get decisions implemented quickly.
If you ask INEOS staff that have been ‘acquired,’ they will tell you that our questioning process is hard, but if you need people to change, habits have to be re-formed. On the other hand, we encourage autonomous management of our individual assets, which is attractive to staff. At Breagh/Clipper South, one of the main changes we made concerned corporate philosophy - how do you run assets in changing circumstances? For instance, we try to see all assets individually such that decisions taken have clear foundations in what improves that specific asset.
Offshore: What is the current production from your fields in the UK southern North Sea?
Tuft: Breagh, Cavendish, Clipper South, Topaz, and Windermere are producing 21,000 boe/d (net to INEOS), with Clipper South accounting for just over half and Breagh just under half. Breagh to start with had just over 1 tcf of gas in place of which 550 bcf looks recoverable, but to do that, we need to drill more wells. Some will be on Breagh Alpha and some on the flank of the field at the proposed location for Breagh B, the concept for which is currently being revisited. We could go with a second fixed platform, but there are other options such as subsea tiebacks.
A rig recently arrived at Breagh Alpha to drill wells nine and 10 and to re-enter others for stimulation purposes. The rig is contracted until early next year, with the option to drill another well on Clipper South: it could, however, be used to drill two or three more targets on Breagh, or we could do this later when we have a clearer view of the field’s long-term development path.
The onshore reception plant for the gas at Teesside, northeast England, is running well and we have a good co-operation with he operator NSMP. We are also looking at doing more with the Breagh infrastructure, which could involve tying gas from other discoveries in the area through Breagh’s subsea pipeline to Teesside.
Offshore: Turning to Forties, INEOS is presumably familiar with the upstream facilities through managing Grangemouth. Do you have plans to upgrade the pipeline system and attract new third-party gas flow?
Tuft: There is quite a regime concerning how you take over offshore pipelines. Since announcing the acquisition we have held dialogue with the UK regulators so that they can see that we are technically capable of running the system. For Forties and other North Sea pipelines such as SAGE and CATS that have changed hands in recent years, new operators will give those systems a renewed focus which is positive. INEOS will try to attract more volumes of oil or gas through the Forties Pipeline System which will help keep unit costs down, and in turn make drilling in areas of the North Sea close to the pipeline route more attractive. This aligns with one of the goals of the UK’s Maximizing Economic Resources (MER) initiative, encouraging greater collaboration between offshore infrastructure operators and third-party suppliers. Under INEOS, Forties will be open for business.
Offshore: DONG had been looking to exit offshore E&P in the North Sea for some time. Did other companies bid for the business aside from INEOS?
Tuft: Other names were mentioned in the press, which isn’t surprising as the portfolio is attractive. In our case, we were seeking increased production, and the Breagh/Clipper assets on their own were not big enough to generate the financial flexibility needed to build production via exploration and appraisal for near-field development. So we were looking for some complementary activity. DONG’s assets bring combined production of around 100,000 boe/d, and that will enable us to develop our portfolio further.
This transaction also gives us access to quality infrastructure via interests in the Laggan/Tormore/Glenlivet and Ormen Lange gas fields and their associated offshore trunklines and onshore gas reception terminals. Total and Shell are respected high-quality operators, so what does INEOS bring to the table? Can we add valuable input through our experience managing onshore petrochemical facilities? Absolutely, especially as we have good relations already with both companies in the chemicals world.
Offshore: The DONG transaction also involves INEOS taking on decommissioning liability. Will the company therefore be looking to prolong the lifespan of the [operated] Siri area platforms and facilities offshore Denmark as far out as possible?
Tuft: At the moment we are looking at a cessation date in the mid- to late-2020s - it depends on whether you add more opportunities or slim down some of the associated costs. That’s always a challenge. As for undeveloped fields such as the HP/HT Hejre and Solsort in the Danish sector and the deepwater Rosebank west of Shetland [operated by Chevron], DONG E&P management sees both as interesting prospects.
To help manage the costs of our growing production portfolio we have established a service company, which to date has supported our onshore seismic acquisition and hydraulic stimulation activities. We found we were spending a lot of money on the platform support vessel and platform maintenance services that were being provided by third parties. For maintenance of our unmanned installations, there can be a need to fly personnel in and out on a daily basis, which is costly, so we have been looking at a different way of doing this by investing in our own vessel, equipped with a walk-to-work service. This can lead to increased productivity, typically 70% per day, compared with 45-50% previously using helicopters.
