The tax changes announced by the chancellor of the exchequer in this week’s budget will lower the value of fields on the block in the U.K. continental shelf, where deals have already been hampered by the cost of dismantling decades-old platforms, analysts and executives said.
“I know of one deal that stopped within half an hour of that tax being announced,” said Mike Tholen, economics and commercial director at Oil & Gas U.K., an industry lobby group, declining to specify the deal. “We had seen asset sales starting to decline already when companies were worried about decommissioning, and the uncertain tax regime makes it much harder to work out prices.”
Osborne raised the tax rate on oil production profit to 62 percent from 50 percent to pay for a tax cut on gasoline for consumers. Shares of EnQuest Plc (ENQ), Valiant Petroleum Plc (VPP) and other producers focused on the North Sea plunged.
There are currently as much as $3 billion of assets for sale in U.K. waters, according to PLS Inc.’s Mergers and Acquisitions database. The biggest seller is BP, seeking buyers for about $1 billion in fields in the southern North Sea. ConocoPhillips has announced it’s selling as much as $1 billion of fields and Exxon Mobil Corp. (XOM) has said it is looking to divest U.K. assets.
London-based BP spokesman David Nicholas said the announcement of the tax change hasn’t altered plans to sell U.K. assets. ConocoPhillips spokesman John Roper said the company didn’t comment on pending legislation. ExxonMobil declined to comment.
While smaller companies would be able to extract more crude and extend the life of the installations, the U.K. law that holds sellers responsible for decommissioning if the buyer can’t pay is leading sellers to demand letters of credit for the potential costs, Iain McKendrick, Chief Executive Officer of Ithaca Energy Ltd., said in an interview. That adds to the expense of the deal and can stop smaller companies from taking on older fields.
“The cavalry certainly isn’t storming over the hill to buy these assets,” Graham Stewart, CEO of Faroe Petroleum Plc, said in an interview at the Acquisition & Divestiture Summit in London March 23. “Getting letters of credit for smaller companies really limits their debt capacity.”
EnQuest, one of the largest independent producers focused on the North Sea that has said it’s looking to acquire more fields, is down 12 percent since the announcement. Nautical, a stakeholder in the Don field with EnQuest, is down 7 percent. Ithaca recovered from a decline after saying that its tax losses mean the company is unlikely to be affected by the tax change for the next five years.
The rate of output decline in the North Sea slowed last year to about 5 percent from a 6.5 percent average over the last decade, according to Oil & Gas U.K. Britain’s offshore reserves still hold 11.6 billion barrels of oil equivalent and would have attracted at least 8 billion pounds ($13 billion) of investment this year before the tax was announced, according to the lobby group.
“The value of assets will be lower, but the bigger issue is in decisions to commit capital,” said Jon Clark, director of oil & gas transaction services at Ernst & Young LLP in London. “The North Sea has to be compared to other regions, and with a less favorable regime people might decide to go elsewhere.”
Osborne’s tax is the third change to the system in a decade that has seen the government’s tax take double, Morgan Stanley & Co. analyst Theepan Jothilingam said in an e-mailed note yesterday. The biggest producers in the U.K. are BP, Total SA (FP), Royal Dutch Shell Plc (RDSA) and Conoco, he said.
Centrica Plc (CNA), Britain’s largest utility which produces almost 7 percent of U.K. output, will add to its North Sea production assets to provide gas for its 5 million U.K. customers, CEO Sam Laidlaw said in an interview last month. Centrica, whose shares fell as much as 10 percent on March 23, also said last October it would sell about $600 million of North Sea fields to focus on its most lucrative areas.
“Valuations of U.K. assets have been lowered by 15 to 20 percent,” said James Hosie, an analyst at RBC Capital Markets in Edinburgh, in an e-mailed note yesterday. “The rate rise is particularly unfortunate for potential sellers of North Sea assets.”
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