Shell PLC (LSE:SHEL, NYSE:SHEL) and Equinor’s North Sea merger plans will offer a string of benefits but come against a backdrop of the region’s shift from an oil and gas to a renewable powerhouse.
The duo on Thursday unveiled a deal to merge their UK North Sea assets to create Britain’s largest independent oil firm with daily production of 140,000 barrels of oil equivalent.
However, production appears far from the main reason for the tie-up, with analysts pointing to tax benefits, cost cutting, legal grounds and even media attention.
“For all the warm words about playing a key role in the UK energy system it could be little more than a corporate tidying-up exercise,” AJ Bell’s Dan Coatsworth said.
“With the UK not seen as a major growth market, this combination appears to make strategic sense in that it allows the two companies to pool resources and continue to grow while allocating less focus [and] capital,” RBC analysts added.
RBC highlighted “tax synergies”, with North Sea firms facing a recently-increased 78% windfall on profits, alongside an anti-new exploration stance from the government.
Such advantages would include the duo being able to offset tax losses from the development of Equinor’s Rosebank field against Shell’s assets, a Financial Times-cited banker highlighted.
That said, uncertainty remains around Rosebank itself, with a legal case against the oil field by Greenpeace running in tandem with a challenge opposing Shell’s Jackdaw gas field.
One reason for the tie-up could be to combat “negative headlines” as a result, Panmure Liberum’s Ashley Kelty said, adding “the eco-lobby are less likely to be opposed to something that doesn’t have Shell in the name”.
Overall though, the move reflects a wider shift among oil firms eyeing an exit from the North Sea, Coatsworth pointed out.
“The substantial discoveries having already been made and production [is] in decline,” he said, noting the tie-up of remaining assets “should be seen in this context”.
Shell shares dipped 1.1% on Thursday, while Equinor fell 2.4%.