By Mack Wilowski, National News Assistant Editor
On Tuesday, Royal Dutch Shell announced it would be pulling back over half of its North Sea oil production, a divestment of over $4.7 billion and a major pullback from the British market. They will sell a significant portion of their North Sea assets to oil distributor Chrysaor, which is set to become one of the top three oil companies in Britain. The deals will increase Shell’s disposals to about $12.5 billion, and the corporation plans to further increase assets to the amount of $30 billion by the end of 2018. The deal will also allow Royal Dutch Shell to reduce its $54 billion of debt accrued after the acquisition of BG Group last year. Executives at Shell believe that the capital and assets used for oil extraction are better off in the hands of Chrysaor, while Shell is better off having extra cash on their balance sheet.
The portion of the deal involving Chrysaor includes a transfer of $3.8 billion in exchange for valuable capital, which Chrysaor could use to expand investment and business within the North Sea basin and coastal regions. Upon completion of the deal later in the year, Chrysaor is expected to become the leading oil producer and independent exploration company within the United Kingdom. Investment firms EIG and Harbor Energy backed the exchange agreements between Royal Dutch Shell and Chrysaor, while Bank of America Merrill Lynch advised Shell in formulating the agreement.
Shell also has interests in other parts of the world, which could prove to be a valuable markets for oil extraction. By divesting their assets in the North Sea, Shell is seeking to expand into other lucrative oil deposits in the Gulf of Mexico and off the coast of Brazil, regions that could offer large-scale oil production possibilities.
Moreover, smaller companies such as Chrysaor are willing to operate within limited zones such as the North Sea, as they are focused on extracting every last bit of oil while simultaneously minimizing the costs of maintaining drilling equipment and tankers. By concentrating on a smaller range rather than spread out over a larger one, profits can be achieved at a lower drilling cost. This leaves larger firms, such as Shell, to focus on riskier and broader projects elsewhere. The terms of the agreement are favorable for Chrysaor, as it will pay $3 billion upfront, plus a potential $780 million payment depending on projected future output and the oil price. Currently, the deal is worth $8.60 for each of the 350 million barrels of crude oil acquired. Chrysaor is expecting to make a profit of $40 for every barrel extracted or produced, as the cost of operations will be slightly below $15 per barrel.
Oil producers were particularly hit hard in 2015 and 2016, when the price of crude oil reached a low of $27 in January of last year. Since then, oil prices have rebounded to above $50, supporting the profitability of oil exploration companies. Limited regulation in the United Kingdom will allow Chrysaor to accumulate more profit in the North Sea market. Shell, meanwhile, must first focus on deleveraging to pay back debt accrued in the past two years. Its acquisition of BG Group in February of last year allowed Royal Dutch Shell to grow at a faster rate than other major oil firms, but the downside becomes growing debt. Shell will need to manage these issues before pursuing further profits in various world markets.
A version of this article appeared in the Tuesday, February 7th print edition.
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