Investment funds enter the North Sea oil and gas market


As the oil and gas market is beginning to recover, new players for example from Asia, Russia or the Middle East, may enter the North Sea.

Regained optimism in the oil industry

Over the last three years, the oil industry has experienced its deepest recession since the 1990s. Experts from the industry still expect it to take years before oil returns to US$90 or US$100 a barrel, which was the norm until the price downfall in late 2014. After that the oil price has increased from below US$30 in early 2016 to over US$50 a barrel by the end of 2016. Now the market is finally beginning to recover from the crisis, and new signs of optimism have given rise to further confidence in the industry. According to some expectations, the oil price could rise to US$60 a barrel or even higher later this year.

North Sea oil is a part of the Danish energy policy

For many years, Danish oil from the North Sea has been crucial to the development of the Danish welfare state. The North Sea oil is a mixture of hydrocarbons, comprising liquid petroleum and natural gas produced from petroleum reservoirs beneath the North Sea. The area continues to hold large reserves of oil and gas. Despite the Danish government's vision of becoming independent of coal, oil and gas on a long-term basis, oil and gas from the Danish fields in the North Sea remain a central priority. Oil and gas is also a part of the Government's Energy Strategy 2050 which comprises several initiatives regarding an efficient and environmentally sound exploitation of Danish North Sea resources.

Licences for oil and gas in the North Sea

The Minister for Energy, Utilities and Climate grants licences for the exploration and production of oil and gas in the part of the Danish territory of the North Sea. A licence grants one or more companies the right to explore for and produce hydrocarbons in a defined area. The Danish state will hold a share of 20 percent of all new licences. Nordsøfonden is the Danish state-owned oil and gas company which manages the state participation in most licences. The activities of the Nordsøfond is governed by Act no. 527 of 28 May 2014 on Nordsøenheden (the Danish North Sea Partner) and Nordsøfonden (the Danish North Sea Fund). The use of Danish subsoil resources is regulated by the Danish Subsoil Act and other rules and regulations.

New players in the North Sea

Today, the radically different market has had significant implications for the companies operating in the North Sea. While the oil crisis has led several oil companies, such as Shell and ExxonMobil, to reduce their North Sea activities, major international equity funds are increasingly investing billions in projects and acquisitions of medium-sized companies which operate in the North Sea.

According to Wood Mackenzie, a global energy consultancy group, international equity funds, such as the American Blackstone and Carlyle, British Bluewater and EIG, have in the past year built up a war chest with US$15 billion targeted the North Sea. The investment funds have historically operated with an investment horizon of five to seven years. However, Wood Mackenzie foresees that this will not necessarily be the case for investments in the North Sea. The typical investment period is likely to become longer. Moreover, Wood Mackenzie expects that initial public offerings (IPOs) are also among the options in the long term.

Historically, equity funds have been reluctant towards making larger investments in the North Sea. There have been investments, but these have been on a small scale. This has changed today. As the oil and gas market is now finally beginning to restore itself, it appears that new players may enter the North Sea. The new players may apply for a new licence or acquire existing licenses or companies with existing licences.