The Scotsman: Shell’s shock sell-off

FRANK URQUHART
Friday 15 June 2007
 
FEARS that Shell is preparing a retreat from its vast North Sea operations were raised yesterday after the oil giant announced plans to sell some of its major offshore assets and to scrap proposals for a £25 million subsea centre of excellence in Aberdeen, Europe’s oil capital.

In an announcement that sent shockwaves through every sector of the industry, Shell revealed that the company and its partner, Esso, were putting their joint interests in six mature North Sea oilfields on the open market, placing the future of 400 jobs in doubt. The sale amounts to 7 per cent of the company’s North Sea portfolio.

And, in a body blow for Aberdeen, the company also disclosed that it is to abandon plans for a showpiece extension to its city headquarters site at Tullos, where it proposed to build a technical campus to serve as a centre for subsea developments for global oil and gas industries.

In addition to the sale of the Cormorant Alpha, Cormorant North, Tern, Eider, Kestrel and Pelican fields, both companies confirmed that they are in negotiations with Fairfield Energy, a Middlesex-based independent operator, for the sale of their interests in the Dunlin cluster of oilfields.

Shell executives were quick to issue reassurances about the company’s “unbridled” commitment to its remaining assets in the UK continental shelf. Following the sale, Shell will still be left with 45 oil and gas-producing assets in the UK continental shelf.

But last night politicians and union leaders voiced concerns about the implications of the surprise sell-off at a time when industry experts say North Sea oil remains in a healthy state.

About 35 billion barrels of oil and gas have been produced from the North Sea over the past four decades, providing £215 billion in tax revenues to the UK Exchequer, and there is still all to play for.

There are, potentially, another 25 billion barrels of hydrocarbons that could still be recovered by an industry which employed 380,000 last year throughout the UK – 290,000 directly by oil and gas companies and the supply chain, with another 90,000 jobs supported by their economic activity.

Professor Alex Kemp, an Aberdeen University oil economist, said Shell appeared to be selling its mature fields that do not produce a lot to firms which specialise in late oilfield life.

He denied that Shell’s decision to scrap the building of a subsea centre of excellence would be a blow to Aberdeen, explaining the specialists would remain in the company’s existing offices.

Shell’s announcement, however, has sent sectors of the industry reeling.

Sir Robert Smith, the Liberal Democrat MP for West Aberdeenshire and Kincardine, said last night that the decision to scrap the £25 million subsea centre would have an immediate impact. “The loss of the symbol of the new headquarters in Aberdeen will be a psychological blow to the North-east,” he said.

“Without this symbolic building, Shell is going to have to work hard to make clear its continued commitment to running global operations from Aberdeen.”

Jake Molloy, general-secretary of the dedicated oilworkers union OILC, said the announcement had come as a “bolt from the blue” to the industry.

He said: “This announcement has come out of nowhere. Only two weeks ago, Shell announced that they were moving contract staff on to a more favourable rota on their North Sea operations and today they are telling the guys there might not be any work for them.”

He added: “Whether Shell are lining themselves up for a complete withdrawal or not, I only wish they would do it sooner rather than later because the longer they sit on some of these assets, the greater risk of attracting new investment.”

Graham Tran, the regional officer for Unite, Britain’s biggest union, said: “I think it’s inevitable that the question will be asked: are Shell committed to the North Sea and the economy of the North-east?

“And you can’t blame them if people come to the conclusion that they are not.

“If Shell don’t want to invest in their North Sea assets, then they should put them on the market and let the good players take the opportunity to increase their North Sea portfolios or enter into the North Sea for the first time.”

Tom Botts, Shell’s executive vice-president in Europe, defended the sell-off, saying: “The assets we are marketing today are not core to our future business and do not compete successfully for investment capital with other opportunities.

“In 2006, these assets represented less than 3 per cent of our European production and attracted just 1 per cent of our total European capital investment.”

And he stressed: “Shell remains committed to Europe and the North Sea as a core business area and holds a key strategic position in security of energy supply to the UK.”

There are 400 Shell staff posts, both onshore and offshore, linked to the assets being sold. A further 361 contract employees work offshore on the four main platforms.

Shell claims that many will transfer to the new owners once negotiations are completed, but has conceded that redundancies cannot be ruled out. Explaining the reason for the sale, Mr Botts said: “Active management of our assets is not new and is a key part of Shell’s portfolio-based strategy. These are relatively high-cost assets within our European portfolio, where other operators might be better placed to add value.

“At Shell, we are committed to focus on where we can best use our people, capital and technologies for competitive, long-term returns on a global basis.”

THE INDUSTRY

Smaller firms will drive forward innovation

“THIS is a continuing process. BP has already sold off a lot of fields to Talisman and sold off Forties to Apache Oil.

Shell was not quite so quick to get involved. A couple of years ago, Shell sold off the greater Kittiwake area. This is merely following a trend. The point is that, for these very big companies, when production in these mature fields gets down to very low levels the assets become, in essence, not terribly interesting and they are deemed to be ‘non-core.’

There are smaller and medium-sized companies, which, in terms of their capital allocation budgets, would be willing to do more with these fields.

My assessment is that selling off these assets is probably a good thing. The incoming companies are more likely to find innovative ways of enhancing oil recovery because that is what happened with Talisman and Apache.

From that point of view, I don’t think it is a worry. Other sales may be possible in due course, but these fields are of relatively-low production, compared to what they were, and to what Shell still produces from its other fields. It is certainly not going to be exiting the North Sea.

There must be a good chance that the sale will lead to greater recovery from these fields. The combined production from these various fields is not all that big, especially for a huge company like Shell. It doesn’t mean that Shell is losing interest in the North Sea at all. It just means that it is planning to sell the assets to companies which have a more specialised interest in late-field-life recovery.

The incoming company may have to be responsible for the eventual decommissioning of the platforms and we are talking about big, old platforms.

The Department of Trade and Industry will be concerned about this and may make conditions of the sale that the liability for decommissioning can still remain with the seller. That is an unresolved issue.

Some years ago Ardmore, the Tuscan Energy platform, was left to the DTI to decommission when Tuscan became insolvent and did not have the money to do the decommissioning. The DTI won’t want that again and will be very careful about what happens to the decommissioning obligation.

This could hinder transactions and it will be a question of whether they have got the balance right.”

• Professor Alex Kemp is a leading expert on the North Sea oil and gas industry and an oil economist at Aberdeen University

THE POLITICS

SNP dispute Labour claim that ‘political instability’ has influenced Shell to reduce investment

SHELL’S decision to scale back its North Sea operations triggered a political row last night as a Labour MP blamed the Scottish National Party administration in Edinburgh for the move.

Anne Begg, the MP for Aberdeen South, suggested that Shell’s decision showed that the SNP Executive’s recent behaviour has left international firms worried about their investments in Scotland.

She said: “One of the fears I expressed during the election campaign was that a major global company who can locate anywhere in the world would no longer view Scotland as the best prospect because of the political instability created by the SNP administration constantly picking fights with the UK government.

“I suspect Shell would deny the SNP has had anything to do with it, but this has come out of the blue. The political stability of where they do business is always a factor that large companies take into account in deciding where to do business.”

The SNP quickly hit back, disputing Ms Begg’s interpretation of the Shell decision and pointing out that decisions made by ministers in London – and especially Chancellor Gordon Brown – also affect the North Sea.

In his pre-Budget report in December 2005, Mr Brown doubled taxes on the profits of North Sea oil and gas companies in an effort to cut his public spending deficit.

A year later, he controversially admitted that his tax revenues from the North Sea would be lower than expected, projecting a £5.5 billion shortfall in the current financial year.

That forecast prompted allegations from opposition parties that Mr Brown’s tax regime was forcing companies out of the North Sea and towards other countries with lower taxes.

And following his Budget this year, Mr Brown was criticised by oil and gas industry leaders for his refusal to extend a 2 percentage-point cut in corporation tax to the domestic oil sector.

A source close to Alex Salmond, the First Minister, last night said Mr Brown’s decision to increase taxes on operators was more likely to have driven Shell’s decision than the election of an SNP Executive.

“This is disappointing, but we must put it into perspective. There will be lots of takers for these valuable assets,” said the source.

“Major companies have been warning about the impact of the tax hikes imposed on the North Sea industry by the Chancellor, which have already caused so much damage. Anne Begg’s remarks bear no relationship to reality – they are an absurd diversionary tactic which will be greeted with ridicule by the industry and the people.”

Mike Tholen of Oil and Gas UK, the industry trade body, said that “uncertainty” over tax rules on North Sea investments is damaging companies’ operations and persuading some to sell up.

“Uncertainty on the fiscal treatment of decommissioning spending is forcing companies to over-provide for the future, making asset trading much more costly”, he said. “Negotiations on deals take longer and are more protracted, because under current legislation, vendors cannot achieve a clean break from their decommissioning liabilities when selling an asset.”

Despite the increasingly political dimension to the story last night, sources at Shell were at pains to keep the company out of the row, insisting yesterday’s investment decision was taken on purely commercial grounds.

“These are commercial decisions and they are nothing to do with any government or executive policy, either now or in the future,” said a company source.

JAMES KIRKUP AND FRANK URQUHART

http://news.scotsman.com/scotland.cfm?id=936942007

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