Industry Trend Analysis - Quick View: Budget Boost For Late-Life Asset Transfers - FEB 2018

The Latest: Following the UK's Budget, oil and gas companies are set to benefit from new legislation allowing for the transfer of tax histories of fields in the North Sea. Previously, potential buyers were dissuaded from purchasing these assets because the purchasing companies did not have a history of profits from the field from which they could claim tax relief.

Implications: Allowing the transfer of a field's tax history in a transaction process will provide a notable stimulus to late-life asset transactions in the North Sea. A closer alignment of buyer-seller valuations due to the ability of the purchaser to claim tax relief removes a significant barrier to deals. We believe that the introduction of legislation through which both the seller and the buyer of a late life asset are incentivised to achieve a deal will be a key catalyst for the development of decommissioning in the UK North Sea. This in turn will help to soften expected decline rates at a number of legacy fields, helping to support overall hydrocarbon production from the North Sea.

As a mature hydrocarbon basin nearing the end of its production life-cycle, the issue of decommissioning the vast amount of offshore infrastructure on the UK continental shelf will be an increasingly important trend in the sector; providing opportunity for a number of private equity companies and a plethora of supply chain companies. Decommissioning represents a large cost for companies at a point in an assets lifecycle in which it is not creating a significant amount of profit (oil and gas production will be declining heavily and maintenance costs will be increasingly high), therefore the introduction of transferable tax histories will support smaller, more specialised companies with a specific focus on maximising the production lifetime and profit from an ageing field.

These types of companies will be a key part of the decommissioning landscape in which larger legacy operators in the North Sea will have less focus on extracting the last barrels from ageing assets and on the subsequent decommissioning process.

Whats Next? The changes on transferrable tax history are set to be introduced in November 2018 following an ongoing review and consultation process. We expect an increase in the number of late-life asset deals in the short to medium-term. New operators at legacy fields with the ability to reapply capital to producing wells (increasing their longevity and productivity through a range of enhanced oil recovery techniques) provides a modicum of upside risk to our UK production forecasts with the potential to squeeze additional oil and gas out of existing assets.

Related Research :

  • ( " Tax Changes To Catalyse Asset Deals " , June 27)

  • ("North Sea Investment To Rise", June 21)