Shell, Equinor Merge North Sea Operations

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Written by Martin Lynch, European News Editor for Industrial Info (Galway, Ireland)--Shell plc (NYSE:SHEL) (London, England) and Equinor (NYSE:EQNR) (Stavanger, Norway) are teaming up to tackle an unsure future in the U.K.'s North Sea by agreeing to merge their offshore oil and gas assets into a 50-50 owned joint venture.

The companies stated that the venture will help "sustain domestic oil and gas production and security of energy supply in the UK." It is also expected to help the companies cope with a production region that is in decline, higher windfall taxes and a new U.K. government that is not supportive of the diminishing oil and gas sector.

"With the once prolific basin now maturing and production naturally declining, the combination of portfolios and expertise will allow continued economic recovery of this vital U.K. resource," they stated. "The new company will be more agile, focused, cost-competitive and strategically well positioned to maximise the value of its combined portfolios on the U.K. Continental Shelf (UKCS)."

Based in Aberdeen, Scotland, the venture will include Equinor's equity interests in Mariner, Rosebank and Buzzard, and Shell's equity interests in Shearwater, Penguins, Gannet, Nelson, Pierce, Jackdaw, Victory, Clair and Schiehallion. A range of exploration licenses will also be part of the transaction. On start-up, the new company will be self-funded. In the short term, Equinor's modest production of 38,000 barrels of oil equivalent per day (Boe/d) will be bolstered by Shell U.K.'s 100,000 Boe/d, giving the venture the ability to produce 140,000 Boe/d in 2025. In the longer term, Shell will get shared ownership in the major Rosebank field, which has the potential to produce 70,000 Boe/d from 2027 and continue producing out to 2050. The venture will also benefit from Equinor U.K.'s £6 billion (US$7.6 billion) of deferred tax losses which the new company can use to offset future taxable profits. Barclays analysts wrote in a note: "Equinor's higher U.K. tax loss position and growth potential offsets the higher current production in Shell's U.K. portfolio, hence the 50:50 split in ownership of the new company."

The new Labour-led government is not a fan of oil and gas, and among its first decisions after taking power this summer was to increase the windfall tax on North Sea oil and gas producers from 35% to 38% and to extend the levy by one year to 2030. The decision bumps up the overall tax rate on oil and gas activities to 78%, which is one of the highest in the world. The government also stopped the levy's 29% investment allowance that allows companies to offset tax from capital that is reinvested.

The future of the Rosebank project, which has a total investment value in excess of £8 billion (US$9.8 billion), is no longer certain. Located around 80 miles from the Shetland Islands, the Rosebank field is the country's largest untapped oil field and is estimated to contain up to 300 million barrels of oil. Although it was given the green light last year by the then Conservative-led government, the permit is now a matter for the courts after environmental lawyers succeeded in blocking any development by claiming that the environmental impact assessment (EIA) documents did not take into account downstream emissions--the impact of the greenhouse gases that will be released when the fossil fuels were eventually burned. Equinor and partners plan to invest US$3.8 billion in the first phase. Industrial Info is tracking four projects associated with Rosebank. Subscribers to Industrial Info's Global Market Intelligence (GMI) Project Database can click here for the report.

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