TTE TotalEnergies SE

By Sarah Kent 

LONDON -- For over a decade, the North Sea's once-booming oil sector was mired in decline. Against the odds, it has emerged as an unlikely bright spot in today's stormy global energy industry.

Investors have sunk more than $16 billion so far this year into European deals for assets mostly located in the North Sea, a flurry that far outstrips energy deal activity in all but American shale country and Canada's oil sands, according to Edinburgh-based energy consulting firm Wood Mackenzie. The biggest deal came last month, with Total SA's $5 billion purchase of A.P. Moeller-Maersk's North Sea-focused oil-and-gas business.

The deal was a sign major oil companies are still willing to invest significant amounts in the region. Many are refocusing on relatively new areas where they can grow, as private-equity funds buy up aging assets and infrastructure that key players have been looking to shed.

Royal Dutch Shell PLC is planning on spending $600 million to $1 billion a year in the North Sea in the coming years, while BP PLC expects to double its production there by 2020. Norway's Statoil ASA has greenlighted production from a new North Sea field that, at its peak, could pump more oil than the entire nation of Ecuador, a member of the Organization of the Petroleum Exporting Countries.

"We see the North Sea turning things around," BP Chief Executive Bob Dudley recently told an oil conference in Aberdeen, Scotland, the center of the British oil industry.

The whirl of activity marks a new chapter for the vast oil-producing region in the waters separating Great Britain from Northern Europe.

Just last year, the U.K.'s North Sea energy industry was described as "at the edge of a chasm" by trade association Oil & Gas UK, as low oil prices hammered investment in a region full of aging, depleted fields. At its peak around 2000, the North Sea produced similar amounts of oil to Saudi Arabia, but output has fallen by around 34% since then, a trajectory that only recently began to reverse.

The region still faces significant challenges. Despite all the M&A activity, only a handful of new developments have been approved this year. And a record number of proposals to dismantle existing infrastructure was submitted in the first half of this year, according to Wood Mackenzie.

But the stabilization in oil prices, some new oil and gas discoveries and the emergence of private-equity money have helped create a sense of optimism across the North Sea industry not seen since prices crashed in 2014.

Private-equity funds have built up war chests totaling $15 billion for North Sea acquisitions, Wood Mackenzie said. Companies backed by funds including EIG Global Energy Partners, Carlyle Group and CVC Capital Partners have already bought sizable asset packages in the region.

Among the largest, after Total, was the $3.8 billion deal made in January by Chrysaor Holdings Ltd., the EIG-backed oil company, for a chunk of Shell's North Sea assets. Shell is now focused on maintaining its North Sea output at around 150,000 barrels a day into the late 2020s.

"The North Sea is in a window of opportunity," Linda Cook, chairman of Chrysaor and chief executive of EIG's investment vehicle, Harbour Energy, said in an interview. "We intend for this to be the first of many acquisitions in the region."

BP has also approached potential buyers about its North Sea oil assets -- although, like Shell, it says it remains committed to the region.

In fact, BP and other major oil players say they are looking at growth in the North Sea, especially in an area west of the Shetland Islands that was once considered too difficult to develop. Chevron Corp. is sitting on one of the region's largest undeveloped fields, which the company says it is working to advance this year.

Total's deal last month is evidence that big oil companies continue to see value in the region. It marked the biggest North Sea-weighted deal in more than a decade, according to Wood Mackenzie, and was Total's largest purchase since the oil-and-gas megamergers at the turn of the century.

The oil-price downturn over the past three years has forced oil producers to make deep cost cuts and driven down prices for contractors and services. Those changes are starting to show results.

BP has slashed its average production costs in the North Sea from a peak of more than $30 a barrel in 2014 to less than $15 a barrel at present. By the end of the decade, the company expects that to come down to below $12 a barrel, Mr. Dudley said last week.

Shell's costs have fallen by 60% -- a reduction matched at competitors, said Steve Phimister, the company's U.K. production director.

"The thing that has differentiated the North Sea is that we've been using that downturn to right the ship," said Mr. Phimister.

(END) Dow Jones Newswires

September 19, 2017 09:14 ET (13:14 GMT)

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