Shell has agreed to sell a package of UK North Sea assets to Chrysaor for up to $3.8bn.
This amount includes an initial consideration of $3bn and a payment of up to $600m between 2018-21, with potential additional payments of up to $180m for future discoveries.
This package of assets comprises Shell’s interests in Buzzard, Beryl, Bressay, Elgin-Franklin, J-Block, the Greater Armada cluster, Everest, Lomond and Erskine, in addition to a 10% interest in Schiehallion.
Shell upstream director Andy Brown said: “Shell has a long and proud history in the UK North Sea, to which we remain committed. This deal complements the great strides we have made over the last two years in improving the competitiveness of our UK upstream business.
“We believe this deal is a vote of confidence in the UK North Sea and offers proof that the industry’s increasing competitiveness, and improvements to the fiscal and regulatory regime, are starting to produce positive results. It will deliver value to Shell, Chrysaor and the UK as a whole, enabling us to continue to strengthen and optimise our UK portfolio and providing a springboard for Chrysaor to bring new investment and growth into the basin.
“It also contributes to the UK’s goal of maximising economic recovery of oil and gas from the UK North Sea, which will continue to be a source of energy, and revenue, for the country for many years to come.”
Depending on the initial consideration received, Shell expects to report an accounting gain on sale against the values of assets of Shell and former BG included in the package.
The decommissioning costs linked with the package are presently expected to be $3.9bn. Of this amount, Shell will retain a fixed liability of $1bn, while Chrysaor will assume the remaining liability. This transaction was effective from 1 July 2016.
The package accounts total production of around 115,000boe/d in 2016.
Shell’s total UK North Sea production during 2016 was around 211,000boe/d.
With completion of the deal, Shell will continue to have a significant presence in the UK North Sea, with production from the Schiehallion redevelopment and Clair Ridge project expected to come onstream.
Shell chief financial officer Simon Henry said: “This deal shows the clear momentum behind Shell’s global, value-driven $30bn divestment programme. It builds on recent upstream divestments in the Gulf of Mexico and Canada. It is also consistent with Shell’s strategy to high-grade and simplify our portfolio following the acquisition of BG, to ensure the company represents a world-class investment case.
“Importantly, the value here represents a profit against the book values of the assets, and a breakeven oil price above that for the BG acquisition.”
Commenting on the sale, Warwick Business School professor of strategic management Christian Stadler said: “It is a common approach for such large companies to look at concentrating on their bigger resources and selling off their smaller ones. Aside from this, it can also be about expertise in a region, as political aspects and appropriate knowledge become necessary. In the case of the North Sea, it has been a struggle since the oil crisis.
"On a wider scale, this could be part of a larger play here as we move towards an era of protectionism. Global companies will be looking more cautiously at which countries to invest in as national borders become more real again and internationalism becomes more difficult, forcing more scaling down.
"Shell is better positioned than most in this regard, however, as they have a heavily decentralised structure so can take things on a country by country basis."
Upon completion of the transaction, around 400 employees are expected to transfer to Chrysaor.
The deal is subject to partner and regulatory approvals.
It is expected to complete in the second half of 2017.
Image: Royal Dutch Shell head office in Hague. Photo: Ccurtesy of P.L. van Till/Wikipedia.