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Shell sells swathe of North Sea assets for up to $3.8 bil

London — * Assets cover over half of Shell's UK output
* Reduces debt burden following BG deal
* Follows BP move to cut North Sea footprint

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Shell has agreed to sell a swathe of North Sea assets accounting for more than half of its UK production to private equity-backed Chrysaor in a multi-billion dollar deal set to trim the major's heavy debts following its acquisition of BG Group.

The sale, worth up to $3.8 billion for Shell, also creates a new independent, top-three North Sea producer with the appetite and financial backing to grow its upstream footprint as larger producers exit the region.

In a statement, Shell said its package includes fields in the "mature" North Sea that produced 115,000 b/d of oil equivalent last year for the company, as well as a 10% stake in BP-operated Schiehallion, a large field in Atlantic waters west of the Shetland Islands.



Schiehallion is currently offline but is due back on stream imminently following a major redevelopment. The field will have production capacity of 130,000 b/d of oil, with a productive life expected to extend to 2035. Shell will still retain 45% of Schiehallion.

The assets include a mix of operated and non-operated assets comprising around 350 million barrels of oil equivalent in proven and probable reserves, with unit operating costs of under $15/b, Chrysaor said.

The widely anticipated deal underlines a trend by the majors to step back from the UK's mature offshore basin, home to the Brent crude benchmark, where rising costs and dwindling volumes have seen them pursue more lucrative projects elsewhere.

BP last week said it was selling its operatorship of the Sullom Voe terminal in the Shetland Islands, the receiving point for the Brent pipeline system, to independent company EnQuest.

Shell's other North Sea assets included in the deal are Buzzard (21.73%), Beryl (39.4%), Bressay (18.4%), Elgin-Franklin (14.1%), J-Block (30.5%), the Greater Armada cluster excluding Gaulpe (76.4%), Everest (100%), Lomond (100%) and Erskine (32%).

Shell currently operates Armada, Everest and Lomond and Chrysaor will assume operatorship of those assets on completion of the sale.


CHRYSAOR PLANS


Shell, which completed its transformative acquisition of the UK's BG Group for $54 billion in early 2016, is looking to reduce the heavy debt burden it took on to finance the deal. The major's net debt to equity, or gearing, stands close to 30%, the highest among its oil major peers. Under the plans to reduce it, Shell has earmarked $30 billion of assets sales set to cut its production by up to 10%, or some 350,000 boe/d.

Separately Tuesday, Shell said it has agreed to sell its stake in the Bongkot field in Thailand for $900 million.

Chrysaor, a private company set up in 2007 to develop oil and gas resources, will become one of the largest producers of oil and gas in the UK behind France's Total and on par with BP after completion, according to a spokeswoman from the UK Oil & Gas.

Chrysaor said it plans "significant reinvestment" in the assets to extend their production life, including enhanced recovery, in-fill exploration drilling, fallow field development and bolt-on acquisitions.

"We will be focused on growth; the vehicle is not about cost cutting, this is about additional potential of the UK North Sea, something that we passionately believe in," Chrysaor CEO Phil Kirk said in a statement published on its website.

Kirk said the company is looking to sustain production from Shell's assets at around 110,000 boe/d as it grows into a full-cycle North Sea producer.

"The North Sea has undergone a revolution in recent times, with operating costs falling to competitive economic levels, and we believe this signals a moment for a generational change in the basin," Chrysaor chairman and former Shell executive Linda Cook said in a statement.


OIL PRICE DEPENDENT


Under the deal, Chrysaor will receive up to $1 billion from Harbour Energy, an investment vehicle of EIG Global Energy Partners, in addition to funds managed by EIG, to pay for the acquisition and provide future growth capital.

Shell is also providing a loan to Chrysaor as part of the deal and has signed hydrocarbon lifting and sales agreements for oil and gas produced from the assets. The independent said it has also secured a reserves based loan of up to $1.5 billion from a consortium of banks to pay for the deal.

The final value of the assets, however, will hinge on a recovery in global oil prices over the coming four years.

Shell said it will receive $3 billion upfront, with up to $600 million contingent on Brent oil prices being above $60/b in 2018-19 and above $70/b in 2020-21. It will earn a further $180 million subject to the achievement of certain exploration milestones.

Should average oil prices fall below $52.50/b between 2018-21, however, Shell will pay back up to $100 million.

Shell is also retaining liability of $1 billion from Chrysaor's future decommissioning costs, which are expected to be $2.9 billion at 2016 values.


SHELL NORTH SEA FUTURE


Shell pointed out it was still retaining significant North Sea production assets -- its total UK production last year was 211,000 boe/d even without Schiehallion, which was offline.

"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 on stream," it said.

Shell upstream director Andy Brown said: "Shell has a long and proud history in the UK North Sea, to which we remain committed."

"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."

The transaction is subject to regulatory and partner consents and is expected to complete in the second half of 2017.

--Robert Perkins, robert.perkins@spglobal.com
--Nick Coleman, nick.coleman@spglobal.com
--Edited by Jonathan Fox, jonathan.fox@spglobal.com