(Dec 5): Equinor ASA and Shell plc will combine their British offshore oil and gas (O&G) assets to form a new company, which they said will be the UK North Sea’s biggest independent producer.
 
The deal reflects the declining status of the country’s offshore O&G industry, which first got going in the 1960s and peaked more than 20 years ago. As production from existing fields dwindles and the average size of new discoveries shrinks, the global majors have been shifting their focus to more attractive investment opportunities elsewhere. 

The introduction of a windfall tax in 2022, which was subsequently toughened by the country’s new Labour government this year, has also prompted outcry from the industry saying that it would lead to lower investment.

The combined companies will be able to “extract longer production time horizons and arrest the decline for a longer period of time than anticipated,” Shell upstream director Zoe Yujnovich told reporters on a call.

While she didn’t specify spending plans, she said the “new venture will have the capability to raise debt and therefore to enable it to make its choices on how it would rank capital.” There are no current plans for an initial public offering of the entity, she said.

The two firms currently employ about 1,300 people in upstream O&G roles in the UK, and pump almost 140,000 barrels a day of oil equivalent. Yujnovich indicated those jobs will remain in the joint venture.

The trend in the North Sea in recent years has been for new entrants — often backed by private equity — to buy up ageing assets from larger companies and combine them into so-called independent producers, such as Harbour Energy plc. This business model has become more challenging since the Labour and previous Conservative government raised taxes on oil and gas companies to boost revenue.

“With the UK not seen as a major growth market, this combination appears to make strategic sense in that it allows the two companies to pool resources and continue to grow, while allocating less focus and capital to the region,” RBC analyst Biraj Borkhataria said in a note. 

Shell and Equinor’s new company will be more focused and cost-competitive, making it better able to maximize the value of North Sea resources, said Equinor’s executive vice president (exploration and production international) Philippe Mathieu. 

“There is a very strong industrial logic to this,” Mathieu said in an interview, adding that through the deal Equinor fulfills its goal of reducing its 80% holding in the Rosebank oil field. The new entity will have the expertise needed to “generate returns from mature fields”, he said.

The transaction is subject to regulatory approval and is expected to close by the end of 2025.

Houlihan Lokey and Jefferies advised Equinor and Shell, respectively.

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