By Clare Munro[*]
The UK Continental Shelf (UKCS) has enjoyed a period of significant deal activity and development announcements over the summer, with more expected to be on the way. July and August saw a huge number of deals done and significant marketing activity, with Chevron announcing its intention to market its Central North Sea assets, ConocoPhillips selling its 16.5% remaining interest in the Clair Field to BP, and Serica and Total signing a sale and purchase agreement for Total’s interests in the Bruce and Keith fields (adding to the Bruce, Keith and Rhum interests Serica purchased from BP in Q4 2017). Neptune and Apache entered into a sale and purchase agreement for the transfer of certain Central North Sea assets, Ithaca committed to purchase the Greater Stella Area interests from Petrofac and Dyas, and North Sea Midstream Partners was acquired by Wren House from ArcLight Capital in a very competitive sale process.
Another significant deal was announced in September– with Hurricane and Spirit entering into a Farm-in arrangement whereby Spirit will initially cover the cost of a £139 million campaign to drill three wells to further prove the potential of the Greater Warwick Area, West of Shetland - an area which holds an estimated two billion barrels of oil. The partners will then work towards a final investment decision (FID) on the first phase of a full field development on the Greater Warwick Area by 2021. This project is anticipate to unlock initial reserves of half a billion barrels from current Greater Warwick Area resources and comes on the back of more good news for the West of Shetland area as Siccar Point announced successful appraisal well drilling on its Cambo discovery, which will be incorporated into the Field Development Plan that is currently being prepared.
Developing ground-breaking contractual structures
On the field development front, in late August Premier Oil announced that the Tolmount Field group (Premier 50% and Dana 50%) had taken a positive final investment decision on the Tolmount development. The key to unlocking this deal was Premier securing an innovative commercial structure for the project which minimises Premier’s capital expenditure while maintaining its exposure to the upside in the Greater Tolmount Area. The arrangement involved the creation of an infrastructure joint venture between CATS Management and Dana, which will own and pay for the construction of the Tolmount platform and pipeline to shore, as well as the upgrades required to the onshore Easington terminal.
The development of this unique and ground-breaking contractual structure was the result of collaboration amongst the Premier, Dana and CATS commercial and legal teams (including a Brodies team acting for Premier led by myself, Sonia Love and Greg May) and involved complex regulatory issues and the development of a bespoke suite of contractual arrangements, as well as the tender and placement of the Platform and Pipeline contracts. The overall process took over a year.
The Tolmount deal is interesting in many ways – it demonstrates the key themes of private equity investment and the continuing role of infrastructure specialists in the UKCS. It also extends the role of an infrastructure owner closer to the wellhead than any previous project – and it involves them right at the beginning of project development, rather than as a purchaser of developed infrastructure. This model could prove very attractive to other UKCS licensees considering alternative ways to sanction CAPEX projects, and other UKCS Infrastructure providers looking for new areas to expand into.
Tax history changes
Activity is expected to remain high going into the fourth quarter as the Transferable Tax History rules came into play on 1 November 2018. The concept of Transferable Tax History was announced in the autumn 2017 budget, after prolonged consultation between the industry and HMRC. Draft legislation was published in early July 2018 and the rules will apply to deals which complete on or after 1st November 2018. The aim of TTH is to facilitate the sale of late-life fields to new investors by ensuring the availability of tax relief on decommissioning expenditure.
Because decommissioning tax relief relates to ring-fenced corporation tax (“RFCT”), currently a potential purchaser acquiring late-life assets who has insufficient RFCT tax history may not be able to fully offset decommissioning losses – even though over the life of the acquired asset significant RFCT on profits will have been paid, and the seller of the asset would have been able to fully off-set the same decommissioning expenditure.
This issue has been blocking potential late-life deals. The TTH rules aim to address this by allowing the seller of a field to allocate a portion of its previously earned RFCT profits to a buyer for the purpose of offsetting decommissioning expenditure.
The significant number of recent deals and developments, as well as new, innovative ways of doing those deals and developments and the imminent arrival of the Transferable Tax History all point to continuing activity in the UKCS deals sector and a positive outlook for the foreseeable future.
[*] Clare Munro, Head of Energy and Infrastructure, Brodies LLP. Clare can be contacted at firstname.lastname@example.org.