Supermajor Shell has agreed to sell a package of UK North Sea assets to Chrysaor for a total of up to US$3.8 billon.
The packaged deal consists of Shell's interest in Buzzard, Beryl, Bressay, Elgin-Franklin, J-Block, the Greater Armada cluster, Everest, Lomond and Erskine, plus a 10% stake in Schiehallion. Subject to partner and regulatory approvals, the agreement is expected to close in 2H 2017, with an effective date of 1 July 2016.
The agreement includes an initial consideration of $3 billion and a payment of up to $600 million between 2018-2021 subject to commodity price, with potential further payments of up to $180 million for future discoveries, Shell confirmed today (31 January).
Private equity-backed Chrysaor said it will rescind a request to cease production on the Armada hub, which is part of a $3 billion package of assets it is to buy from Shell, and plans instead to extend the life of the facility. Further "significant reinvestment" plans are expected across the firm's new portfolio.
The deal with Shell, which has a $30 billion divestment program, is worth up to $3.8 billion, and is dependent on future oil prices. The package of assets, which represents nearly half of Shell's UK North Sea production, at 110,000 b/d of its 211,000 boe/d production in 2016, includes Shell's 21.73% interest in the giant Buzzard field (the largest producing field in the North Sea, operated by Nexen).
The other stake that Shell has agreed to sell includes the Apache-operated Beryl fields (39.4%), Statoil's Bressay heavy oil discovery (18.4%), the Total-operated Elgin-Franklin fields (14/1%), the J-Block (30.5%) and Erskine (32%), operated by Chevron.
Under the deal, Chrysaor will take over operatorship of the the Greater Armada cluster (76.4%), Everest (100%), and Lomond (100%). These fields were operated by Shell, following its acquisition of BG Group last year.
Chrysaor will also get plus a 10% stake in the Schiehallion, i.e. Quad 204, operated by BP, which is being redeveloped and is due on stream this year. Shell retains a 45% stake in the development.
According to Chrysaor, current unit operating costs across the portfolio are under $15/bbl, which is low for the North Sea. The deal will total about 350 MMboe proven and probable (2P) reserves, says Chrysaor, which will pay $3 billion initially, then up to $600 million between 2018-2021 - but only if oil prices are above $60/bbl in 2018-19 and above $70 in 2020-21. If prices fall to between $47.50-$52.50, Shell will then pay Chrysaor up to $25 million a year.
Shell is also providing a vendor loan to Chrysaor as part of the deal. It has also signed oil and gas lifting and sales agreements for oil and gas produced from the assets being sold and will assume liability for up to $1 billion future decommissioning costs, estimated at $3.9 billion in total.
This morning, Shell said: "Following completion, Shell will retain a significant, more focused and strengthened presence in the UK North Sea, with production from the Schiehallion redevelopment and Clair Ridge project expected to come onstream."
Andy Brown, Shell’s upstream director, 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 optimize 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 maximizing 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.”
Simon Henry, Shell CFO said: “This deal shows the clear momentum behind Shell’s global, value-driven $30 billion divestment program. 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.”Chrysaor was set up in 2007, but has not yet operated any producing assets. The firm said: "Chrysaor strongly believes that the North Sea presents an attractive opportunity to build a large scale and independent full-cycle exploration and production business. The North Sea basin is roughly half way through its productive life. This is typically a point where a new generation of operators steps in to maximize a basin's total potential, bringing fresh capital, new strategic priorities and new techniques. The package Chrysaor has agreed to buy from Shell represents an ideal set of assets upon which to build such a company and to help realize the North Sea’s potential."
Chrysaor said it will aim to extend the production life of the assets in various ways, including: enhanced recovery techniques, in-fill exploration on and around the acquired acreage, fallow field development, and bolt-on acquisitions.
The firm has said it plans to withdraw the cessation of production notification for the Armada hub and will instead invest to extend the life of the hub.
Chrysaor CEO Phil Kirk Phil qualified as a chartered accountant with Ernst & Young in 1991 before joining Hess, which previously operated the Armada hub, in 1996. He left Hess in 2002 to co-found CH4 Energy with two other ex-Hess colleagues. Kirk was joint MD of CH4 which acquired and operated the Markham field and associated satellites on the UK/Dutch median line.
Chrysaor chairman Linda Z. Cook is currently CEO of one of the firm's private equity investors, Harbour Energy and also a Managing Director and member of the Executive Committee of EIG, its other main investor.
Cook retired from Shell plc in 2010, where she worked for 29 years holding positions including CEO of Shell Gas & Power; CEO of Shell Canada; EVP Strategy & Finance for Global Exploration & Production; and various US Exploration & Production management, operational and engineering roles.
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