Shell agreed to sell roughly half of its UK North Sea assets to independent firm Chrysaor for up to $3.8 billion.
Chrysaor, backed by Harbour Energy, an investment vehicle of EIG Global Energy Partners, said the deal would make it the UK’s leading independent oil and gas company focused on the North Sea.
Chrysaor said the UK North Sea “has material future potential for oil and gas production” and that it planned to sanction drilling activity and investment “that would extend the life of the key operated hubs.”
Linda Cook, managing director of EIG and CEO of Harbour Energy, and a former director of Royal Dutch Shell plc, is joining Chrysaor as chairman.
The assets being sold produced 115,000 barrels of oil equivalent per day (boepd) in 2016.
Shell’s total UK North Sea production during 2016 was 211,000 boepd.
The assets consist of Shell’s interests in Buzzard, Beryl, Bressay, Elgin-Franklin, J-Block, the Greater Armada cluster, Everest, Lomond and Erskine, and a 10% stake in Schiehallion.
With the exception of Schiehallion, in which Shell will retain a 45% stake, the percentages being sold represent Shell’s total interest in each of the assets.
The sale is part of Shell’s debt-reduction plan following its roughly $50 billion takeover of BG Group.
“Chrysaor intends to grow the assets being acquired, and has identified a number of early incremental opportunities to maximise economic recovery and extend field life,” said Chrysaor.
“As part of this programme, the company plans to sanction drilling activity and investment that would extend the life of the key operated hubs and will actively encourage third-party business and the acceleration of drilling initiatives elsewhere in the portfolio.”
Chrysaor said it would receive an investment of up to $1 billion from Harbour Energy to support the acquisition and provide future growth capital and that a “reserves-based loan” of up to $1.5 billion would be provided by a syndicate of international banks with North Sea experience.
The stake in each of the assets being sold by Shell is as follows:
Buzzard (21.73%), Beryl (39.4%), Bressay (18.4%), Elgin-Franklin (14.1%), J-Block (30.5%), the Greater Armada cluster excluding Gaulpe (76.4%), Everest (100%), Lomond (100%), Erskine (32%) and Schiehallion (10%).
Shell is the operator of Armada, Everest and Lomond — Chrysaor will assume operatorship of those assets when the deal closes.
Chrysaor CEO Phil Kirk said: “Chrysaor is acquiring a high quality package of assets which combine low cost production, a substantial reserves and resources base with strong cash flows and a highly competent and skilled workforce …
“This acquisition reflects Chrysaor’s and Harbour’s belief that the UK North Sea has material future potential for oil and gas production.
“The UKCS has benefited from government action to improve the regulatory and fiscal environment in the North Sea and we look forward to working with them in the future.
“We intend to create a UK champion, with the skills and resources of a major independent oil and gas company, to help ensure that the basin’s future potential is realised safely, profitably and in alignment with the government’s policy of driving investment and maximising economic recovery.”
Chrysaor chairman Linda Cook said: “The North Sea has undergone a revolution in recent times with operating costs falling to competitive economic levels, and we believe this signals a moment for a generational change in the basin.
“Chrysaor, backed by Harbour, will form a platform for significant growth in the region.
“We look to acquire further assets that are material to our business as we bring to bear energy, skills and additional investment to enable the company to perform to full potential.”
Shell said decommissioning costs associated with assets being sold are currently expected to be $3.9 billion of which Shell will retain a fixed liability of $1 billion and Chrysaor will assume the remaining liability.
The deal is subject to partner and regulatory approvals, with completion expected in the second half of 2017.
Shell said it would provide a “vendor loan” to Chrysaor as part of the transaction and has signed hydrocarbon lifting and sales agreements for oil and gas produced from the assets being sold.
Andy Brown, Shell’s upstream director, said: “We believe this deal is a vote of confidence in the UK North Sea and offers proof that the industry’s increasing competitiveness, and improvements to the fiscal and regulatory regime, are starting to produce positive results.
“It will deliver value to Shell, Chrysaor and the UK as a whole, enabling us to continue to strengthen and optimise our UK portfolio and providing a springboard for Chrysaor to bring new investment and growth into the basin.
“It also contributes to the UK’s goal of maximising economic recovery of oil and gas from the UK North Sea, which will continue to be a source of energy, and revenue, for the country for many years to come.”
Around 400 Shell staff are expected to transfer to Chrysaor.
Shell’s chief financial officer Simon Henry said: “This deal shows the clear momentum behind Shell’s global, value-driven $30 billion divestment programme.”
The total sale price of up to $3.8 billion comprises three key elements:
- An initial consideration of $3.024 billion
- Up to $600 million contingent on Brent oil prices being above $60 per barrel in 2018-19 and above $70 per barrel in 2020-21
- Up to $180 million subject to the achievement of certain exploration milestones
Shell said it would make a payment to Chrysaor of up to $25 million a year between 2018-21 should the average oil price during that time fall in or below the range of $47.50 — $52.50 per barrel.
Chrysaor said that “reflecting the new investment and the ongoing commitment to the UK North Sea’s growth” the Chrysaor board had been strengthened, with Linda Cook and others joining its ranks.
Other additions to the Chrysaor board include: G. Steven Farris, former chairman and CEO of Apache corporation; Andrew Jamieson, former executive vice president gas and projects for Shell; R. Blair Thomas, chairman and CEO of EIG.
Chrysaor chief executive Phil Kirk and chief financial officer Andrew Osborne will both continue as board directors. Directors standing down are Francis Gugen, Robert Poddubiuk and Dick Covington.