North Sea's last hurrah
M&A in the region picked up in 2017, but European output was still expected to wane
A flurry of mergers and asset deals, along with a handful of promising discoveries over the past year or two, left many hopeful in 2017 that the fast-maturing North Sea still had some juice left in it. Eastern European states, meanwhile, continued to rail against Russian gas, as well as climate-change measures that might hurt their economically important coal industries.
The $9bn that changed hand in deals relating to North Sea exploration and production assets in the first half of 2017 was more than the total value for 2016 as a whole, according to consultancy Wood Mackenzie—and momentum continued in the second half, notably with Total's $7.45bn purchase of Maersk Oil from AP Moeller-Maersk in August. This gave the French giant an even stronger position in the North Sea than before. "You need to jump on opportunities that arise, especially at the bottom of the cycle when assets are cheaper," Patrick Pouyanné, Total's chief executive said.
Other major deals in 2917 included Chrysaor's purchase of a package of Shell's North Sea assets worth almost $4bn, private-equity-backed Neptune Oil & Gas's acquisition of Engie's exploration and production business for around $4bn, and the purchase by Ineos of the oil and gas business of Denmark's Dong Energy for $1.3bn. (Dong Energy announced a name change, to Ørsted, disappointing headline writers.)
The flurry of North Sea M&A activity in 2017 may have been a final hurrah—by year end, the list of targets was dwindling. Recent deals also looked unlikely to herald much more than an Indian summer for production. New discoveries continued a trend of failing to best the decline in output—even as producers rushed to install the latest recovery techniques.
Rystad Energy reckoned on total production in western Europe—mainly offshore Norway, the UK and the Netherlands—would amount to 7m barrels of oil equivalent a day in 2017, but shrink to 6.2m boe/d within eight years.
'You need to jump on opportunities at the bottom of the cycle, when assets are cheaper'—Patrick Pouyanné, Total
That said, the region has still thrown up occasional spectacular discoveries in recent years, some of which ended 2017 almost ready for their day in the sun. In the Norwegian North Sea, Statoil and Lundin's Johan Svedrup project in the Utsira Height region is due to start within a couple of years, and produce up to 0.66m b/d. By end-2017, Statoil was expected to take a final investment decision on the $6bn Johan Castberg development in the Barents Sea. It might come on stream by 2022.
In the UK, Hurricane Energy's major discovery early 2017 in the Greater Lancaster area, west of the Shetland Islands, was heralded as potentially the largest in UK waters for more than 15 years. Recoverable reserves could be 1bn barrels—and production might start in 2019.
Elsewhere in Europe, American liquefied natural gas made more inroads into the market. Poland and other East European countries jumped at the opportunity, seeing the supply as a cheap alternative to Gazprom's gas. Gazprom, for its part, seemed to take this threat in its stride: its exports to Europe had increased by about 13% in the first half of 2017 compared with 2016. It hadn't yet launched the price war many analysts expected, either. And it pushed on with its Nord Stream 2 gas pipeline project to Germany. In April, it signed financing deals with a host of big buyers in the continent, underpinning half of the project's cost.
Domestic politics had its say in Europe in 2017 too. A victory for Norway's incumbent Conservative party ensured a continued pro-oil government stance there. The Conservative Theresa May was also re-elected as UK prime minister, albeit with a smaller-than-expected majority and much-diminished power. Negotiations over the UK's departure from the EU were messy, fruitless and inconclusive. No one could say what shape Brexit would take. Some even started to predict it wouldn't happen. In Germany, Angela Merkel won her election—but by the fourth quarter of 2017 was facing lengthy coalition negotiations to form a government.
In France, Emmanuel Macron saw off a far-right party to become president. Greens were pleased; oil and gas firms less so. He said his government would stop granting licences for new oil and gas exploration, as part of a renewable energy drive—a cautionary note for the oil industry in a region leading the charge towards greater use of green energy and electric vehicles.
This article is part of Outlook 2018, our annual book looking at energy market trends for the year ahead. To purchase a copy, click here