A recent surge in North Sea deals, driven by private-equity money, will inspire other investors to spend more in the aging basin where gross revenue has turned positive for the first time in five years, Britain's oil lobby said, according to Reuters March 7.

The UK North Sea oil and gas market has attracted deals worth $4 billion since January, including private-equity-backed Chrysaor's $3.8 billion acquisition of a large chunk of Shell's North Sea fields.

Other private-equity investors including Siccar Point, Carlyle Group, Neptune and CVC Partners have bid for or acquired North Sea assets in recent months.

"They want good returns and you get that by investing and squeezing the rest of production out of your assets," Mike Tholen, economics director of lobby group Oil and Gas UK, told Reuters.

"Others will take signals from that. If you see others make good returns it's embarrassing if you don't do the same."

The group said in its annual business outlook that E&P companies' gross revenue in the UK North Sea had turned positive and was expected to remain so this year, the first positive annual returns since 2012.

The jump into the black has mainly been driven by a rise in Brent crude prices to above $55 a barrel (bbl) and the fact that operational and investment costs have fallen considerably, the group said.

Unit operating costs have slipped to $15.3/boe from $29.7/boe in 2014.

E&P companies' free cash flow is expected to rise to around 5 billion British pounds (US$6 billion) in 2017 after years of negative liquidity because costs far exceeded revenue.

Britain is also in dire need of fresh investments in new projects, not just existing ones, as oil companies have yet to make a final decision on whether to inject cash into about 14 new fields between now and the end of 2018, Oil and Gas UK said.

"If we don't see further activity coming by the time we get to 2020 and beyond, production will again be on a quite steady downturn," Tholen said.

After years of decline, U.K. production is expected to rise for a third consecutive year in 2017 to between 680 MMboe and 690 MMboe due to projects coming onstream that were approved before the oil price collapsed in mid-2014.

But production could contract again if new investments fail to keep up with existing fields' natural rate of decline.

"Now that prices are a bit more stable, people are generating some cash and we hope to see some of that reinvested. Now is the right point in the cycle," Tholen said.

Changing Tax Rules

In a separate article published March 8, Reuters reported that Britain will explore ways of making it easier to sell North Sea oil and gas fields by changing tax rules in order to keep the fields producing for longer, the finance ministry said.

The move, which is due to be announced in finance minister Philip Hammond's budget on March 8, follows a call by the industry's oil lobby group for a change to decommissioning tax rules that have prevented deals in the North Sea.

Owners of oil and gas assets get tax relief on the future costs of dismantling them, but as assets are sold the relief cannot be passed on to new owners.

"The U.K. government will publish a discussion paper and establish a panel of industry experts to consider how tax can assist sales of oil and gas fields, helping to keep them productive for longer," the ministry said in a statement.

The North Sea has seen an uptick in deals in 2016, mainly due to the $3.8 billion acquisition of a large chunk of Shell's assets by private-equity-backed Chrysaor.

But deals would have been concluded more quickly and others would come to fruition if the decommissioning cost taxation regime is updated, Mike Tholen, economics director of Oil and Gas UK, said.

"For [new buyers] it would be easier for the deals they are thinking about if the ability to release decommissioning tax relief between the vendor and the purchaser was part of the tax regime," Tholen added.

Many traditional North Sea operators, such as Shell or BP, are gradually winding down ownership of old North Sea assets as smaller, more nimble companies snap them up to apply new technologies that help extract more oil or gas.

"The right assets need to be in the right hands to maximize economic recovery late in the life of the North Sea," said EY's head of oil and gas tax, Derek Leith. (US$1 = 0.8153 British pounds)

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