Transactional activity in the energy sector - market snapshot

For many decades, the Norwegian continental shelf (NCS) has offered great opportunities for petroleum exploration and production. While many areas are now mature, virgin areas still remain on the NCS. The Petroleum Directorate estimates that about 27% of Norway's reserves are still undiscovered. Much of these reserves are expected to be gas and located in harsh environment areas in the northern Norwegian Sea and in the Barents Sea; however, major discoveries in the Sverdrup and Ivar Aasen fields in recent years testify that significant petroleum deposits remain to be discovered.

Applications for acreage in the 23rd NCS licensing round were due in November 2015. The applications submitted indicate that, despite lower oil prices and a high-cost, high-risk environment, there is still reasonable interest for exploration in the far north. Twenty-six companies have applied for acreage in the northern Norwegian Sea and the Barents Sea.

The dramatic fall in oil prices since mid-2014 has resulted in several projects being put on hold, fewer exploration and production wells being drilled and less maintenance being conducted. To mitigate the consequences of what may seem to be a permanent change in the oil price, NCS players and contractors are looking to reduce costs where possible and have been cutting back on staff and enhancing cost efficiencies. Some are looking to the government for tax breaks or other government initiatives to help to mitigate the situation, but none have been offered so far.

On the other hand, the ongoing turbulence is creating new opportunities in the transactional space. The lower oil prices force many international oil companies to focus their efforts on where they expect to receive the highest return on investment. At the same time, some players with a higher appetite for risk see opportunities. Following the Summer 2015 establishment of an oil price floor of around $40 per barrel for Brent crude, many transactions have been executed over the past few months and many corporate and asset opportunities in the NCS appear to be available.

Following the establishment of the exploration cost tax refund regime, the number of exploration and production (E&P) companies active on the NCS rapidly increased to almost 60 at the end of 2013. In the current buyer's market, almost everything appears to be for sale if the price is right. Although this appears to be a dramatic development, it may also be a necessary correction in a market consisting of a significant number of small cap exploration specialist companies. In the current market situation, the players see less room for specialist exploration phase E&P companies.

Players from Russia and further east, which in recent years have increasingly sought to enter the NCS market, seem to have put their interest on hold, limiting the current buyer universe to existing NCS players and private equity investors.

The key recent M&A deals in the market are set out in the table below.

Traditionally, relatively few of the NCS deals have been share transactions, but this trend is now clearly on the rise. In addition, numerous asset transactions take place each year, facilitated by a fluent market, limited regulatory hurdles and the use of standard transaction documentation developed by the Norwegian Oil and Gas Association (NOROG).

Risk sharing seems to be the driver behind many farm-ins in exploration acreage at present and, as the oil price steadily drops, there are new constellations of cooperation on the NCS between established majors and more risk-hungry smaller private equity players. The few exploration wells drilled seem to attract huge interest from the latter.

The NOROG standard share and purchase agreement (SPA) is widely used – with limited amendments – for asset deals in the exploration phase, of which there is currently a high volume of transactions. The concept of a standard SPA widely accepted in the market offers numerous advantages in the context of a large number of asset transactions:

• it is simple and straightforward;
• it is fine-tuned to Norway's civil law environment and prevailing contractual principles;
• its terms are fairly balanced and efficient; and
• limited legal involvement is required to bring deals to execution.

However, it is not always fit for purpose, especially where the transaction involves particular, more complex elements.

The standard SPA is also widely used as a basis for transactions of producing assets, although with significant adjustments depending on the assets to be sold. In this context, the final agreement will often provide for tighter warranties and indemnifications, a limited guarantee period and decommissioning security agreements.

The trends on the asset and corporate sell-side post-oil price slump are as follows:

• Supermajors are selling production;
• Majors are optimising their portfolios or selling production;
• Certain utilities are leaving, optimising their portfolios or selling production;
• Certain large and mid-caps are leaving, optimising their portfolios or selling production;
• Some small-caps are leaving; and
• Norwegian operator Statoil is optimising its portfolio.

Meanwhile, on the buy side the trends are as follows:

• No supermajors (including Statoil) are buying;
• Few majors are buying;
• Some utilities are buying;
• Some large and mid-caps are buying;
• Private equity is buying corporate; and
• Private equity small-caps are buying assets.

For further information on this topic please contact Preben Willoch or Silje Wollan Einum at Advokatfirmaet Simonsen Vogt Wiig by telephone (+47 21 95 55 00) or email (pwi@svw.no or sei@svw.no). The Advokatfirmaet Simonsen Vogt Wiig website can be accessed at www.svw.no.