Friday, April 08, 2011
Dow Jones Newswires
by Sarah Kent & Iain Packham
The U.K.'s new levies on oil production could benefit small North Sea producers eager to snap up aging fields from international energy giants looking to minimize their exposure to the tax increase.
The tax, which increases the charge on profits from U.K. oil and gas production to 32% from 20%, is likely to force oil majors to lower the sale price of aging offshore fields, providing bargains for the smaller companies already in the market to buy them.
This could speed up the shift in ownership of North Sea assets, from the large companies that dominated production in the region when output was at its peak to smaller companies specializing in recovering oil and gas from fields well into their decline.
"I do see a silver lining. Fewer companies will be coming into the [North Sea]," said EnQuest's Chief Executive Amjad Bseisu. "There will be fewer buyers and more sellers because of the deterioration and degradation in the tax situation."
The tax increase, which took the industry by surprise, narrows already-slim profit margins on many of the older North Sea fields, where declining reserves are becoming more expensive to extract.
Larger companies tend to invest only when they expect a higher returns, and they usually view the expense of breathing new life into a mostly-depleted field as not worth the small reward. Smaller companies, which tend to have fewer qualms about lower returns, are now finding they can snap up assets at a fraction of the price of as little as two weeks ago when the tax was introduced.
Among the large international oil companies active in the North Sea, Statoil, Total and BASF subsidiary Wintershall have all said they are reviewing investment plans. Meanwhile, smaller independent oil companies including Valiant Petroleum and EnQuest have said that the tax hike will benefit their ongoing strategy to buy more North Sea reserves.
"The tax increase will make assets more peripheral to major companies because they will decrease in value," said Peter Basset, an oil and gas analyst at Westhouse Securities. "After a period of reflection quite a lot of assets will come on to the market at a lower price."
North Sea investment has profound consequences for global oil prices. The Brent blend, used as a pricing benchmark for much of the crude bought and sold in Europe and Asia, is produced from North Sea fields. Declining output has caused Brent prices to fall out of step with the global market in the past, and could do so again without continued investment in older fields and exploration.
The bargain hunting has already begun. Earlier this week Ithaca announced its acquisition of Hess' interest in two North Sea fields for $74.6 million and Ithaca's 10% stake in three North Sea exploration blocks.
Cenkos Securities said this is the equivalent of paying $14.30 a barrel for the assets, compared with $17.50 a barrel paid last October by Faroe Petroleum for an 18% stake in the Blane field.
The deal works out especially favorably for Ithaca as it expects to be shielded from the rise in taxes, at least initially. It posted a loss of $215 million at the start of 2011, which it estimates will exempt it from cash taxes for the next five years. In the U.K. companies are able to offset losses against their profits when paying tax. Other small North Sea operators are in a similar position.
However, the window of opportunity for smaller oil producers could be closing. The oil industry is lobbying the U.K. government for more favorable tax terms, including extra incentives for natural gas production, lower taxes on marginal fields and a tax reduction if oil prices drop. Some companies may hold off from selling their assets until the tax issue is settled.
"Until there is absolute clarity from the government as to what the fiscal regime will be, I can't see many large deals getting done," said James Hosie, an analyst at RBC Capital Markets.
The tax, which increases the charge on profits from U.K. oil and gas production to 32% from 20%, is likely to force oil majors to lower the sale price of aging offshore fields, providing bargains for the smaller companies already in the market to buy them.
This could speed up the shift in ownership of North Sea assets, from the large companies that dominated production in the region when output was at its peak to smaller companies specializing in recovering oil and gas from fields well into their decline.
"I do see a silver lining. Fewer companies will be coming into the [North Sea]," said EnQuest's Chief Executive Amjad Bseisu. "There will be fewer buyers and more sellers because of the deterioration and degradation in the tax situation."
The tax increase, which took the industry by surprise, narrows already-slim profit margins on many of the older North Sea fields, where declining reserves are becoming more expensive to extract.
Larger companies tend to invest only when they expect a higher returns, and they usually view the expense of breathing new life into a mostly-depleted field as not worth the small reward. Smaller companies, which tend to have fewer qualms about lower returns, are now finding they can snap up assets at a fraction of the price of as little as two weeks ago when the tax was introduced.
Among the large international oil companies active in the North Sea, Statoil, Total and BASF subsidiary Wintershall have all said they are reviewing investment plans. Meanwhile, smaller independent oil companies including Valiant Petroleum and EnQuest have said that the tax hike will benefit their ongoing strategy to buy more North Sea reserves.
"The tax increase will make assets more peripheral to major companies because they will decrease in value," said Peter Basset, an oil and gas analyst at Westhouse Securities. "After a period of reflection quite a lot of assets will come on to the market at a lower price."
North Sea investment has profound consequences for global oil prices. The Brent blend, used as a pricing benchmark for much of the crude bought and sold in Europe and Asia, is produced from North Sea fields. Declining output has caused Brent prices to fall out of step with the global market in the past, and could do so again without continued investment in older fields and exploration.
The bargain hunting has already begun. Earlier this week Ithaca announced its acquisition of Hess' interest in two North Sea fields for $74.6 million and Ithaca's 10% stake in three North Sea exploration blocks.
Cenkos Securities said this is the equivalent of paying $14.30 a barrel for the assets, compared with $17.50 a barrel paid last October by Faroe Petroleum for an 18% stake in the Blane field.
The deal works out especially favorably for Ithaca as it expects to be shielded from the rise in taxes, at least initially. It posted a loss of $215 million at the start of 2011, which it estimates will exempt it from cash taxes for the next five years. In the U.K. companies are able to offset losses against their profits when paying tax. Other small North Sea operators are in a similar position.
However, the window of opportunity for smaller oil producers could be closing. The oil industry is lobbying the U.K. government for more favorable tax terms, including extra incentives for natural gas production, lower taxes on marginal fields and a tax reduction if oil prices drop. Some companies may hold off from selling their assets until the tax issue is settled.
"Until there is absolute clarity from the government as to what the fiscal regime will be, I can't see many large deals getting done," said James Hosie, an analyst at RBC Capital Markets.
