Transaction Drag

The Oil & Gas Authority (OGA), through its tripartite approach, works closely with industry and government, including on matters relating to commercial behaviours and transactions.

Transaction drag: Industry observations collated by the OGA

Over the last few years, the UK Continental Shelf (UKCS) has seen a marked increase in Mergers & Acquisitions (M&A), with transactions ranging from single asset divestments to major corporate acquisitions. These multi-billion pound transactions have resulted in a very different corporate mix compared to when the OGA was established, with some companies divesting long held assets and new entrants acquiring them. These new entrants have the financial means and motivation to invest, providing the capital for new exploration, development and redevelopment projects. At the same time, they often bring new ways of working into the UKCS

In 2017, buyers and sellers raised concerns with the OGA about the amount of time it took for third parties, often Joint Venture partners, to provide consent to licence assignments. As a result, the OGA wrote to Oil & Gas UK (OGUK), highlighting the matter and requesting action by industry to address this “transaction drag”.

OGUK’s Commercial Managers’ Forum (CMF) set up a working group to address this issue, through planning and engagement during an M&A process, and publishing Transaction Best Practice (TBP) guidance. This welcome guidance focuses on achieving a timely transfer of interest via early discussion with third parties, rather than defining what might constitute reasonable or unreasonable behaviours during a transaction.

During that process, the OGA continued to hear from industry about the impact of protracted third-party approval processes, resulting in buyers and sellers changing their approach to M&A on the basin. Since 2018, this has manifested itself as an increase in corporate transactions compared to asset deals; however, this trend cannot continue indefinitely. There will come a time in the future when buyers cannot acquire neatly packaged corporate entities, and, in turn, will need to acquire standalone assets or asset packages. Transfers of UK oil and gas assets require third party approvals, which can take time and can be delayed by unreasonable behaviour. The OGA does not want to see “transaction drag” impact the timely completion of these transactions.

Between the period December 2018 and May 2019, the OGA conducted a series of interviews to understand better the issues at the heart of this transaction drag. The interviews covered a range of buyers, sellers, third parties and legal advisors involved in recent UKCS asset transactions, in order to understand how parties have overcome obstructions to approvals by Joint Venture (JV) partners and collate industry’s views on what constitutes reasonable or unreasonable behaviour in asset transfers.

The result of this engagement is the following summary of industry’s observations, and suggestions from industry on what constitutes reasonable and unreasonable behaviours within a transaction approval process. Industry believes that adhering to reasonable behaviours will support maximising economic recovery, ensuring the right assets are in the right hands, and reducing transaction costs.

This summary of industry’s observations does not create any regulatory burden, but reinforces the importance of adhering to the TBP guidance created by industry. However, if parties continue to report to the OGA or exhibit what industry may regard as unreasonable behaviours on transactions, the OGA may consider using its powers to address such behaviours.

 

Summary of industry’s views on what constitutes reasonable behaviour:

  • For all parties to behave in accordance with the relevant OGA’s Stewardship Expectations, agreed industry voluntary codes (e.g. Infrastructure Code of Practice, Commercial Code of Practice) and current best practices (Transaction Best Practice), and to commit to a positive working relationship.
  • For the buyer and seller to put in place a transaction engagement plan for discussion with JV partners once the Sale & Purchase Agreement is signed. This should include a realistic timetable which reflects how long it might take for JV partners to respond (considering public holidays, complexity of the deal, etc.). Further, the plan should consider any existing issues in the JV that could impact or delay approval, including the possibility of pre-emption by JV partners and be mindful of separate transition to operatorship workstreams and the time that this could take. It should also consider other parties whose consent will be needed, such as infrastructure providers.
  • For there to be early and open dialogue to articulate matters of concern upfront, accepting of bona fide issues, with particular regard to technical capability to operate (if appropriate). JV Partners should be clear on what their concerns are and what is required from a buyer or seller to mitigate those concerns e.g. state the basis for calculating a financial guarantee and avoid the “guess again” approach.
  • For issues relating to financial (and where applicable) technical capability, for the buyer and seller to be transparent and to have considered how to address legitimate concerns and/or risks faced by the JV.
  • For a “capability pack” to be provided by the buyer to cover financial, technical and operational capability. The pack should clearly set out to JV partners how the buyer demonstrates capability in these areas and be prepared to fully explain buyer funding arrangements to partners.
  • In consideration of the assessment of financial and technical capability, JV partners should have timely access to required resource and materials provided by the buyer and seller, either in the capability pack or in response to JV partner queries and should address any, technical and financial concerns in parallel.
  • To expect a level playing field, with the buyer being treated equally to their prospective JV partners, and for buyers, sellers and JV partners to have a decision-making mandate in the UK to ensure traction, ownership, accountability and for discussions to take place at an appropriate level.
  • To expect that deeds of guarantee from buyer or seller be time limited, rather than evergreen, and include agreed upon review points to enable a buyer to demonstrate financial capability if required.
  • For non-UK headquartered JV partners to have sufficient understanding of the UKCS corporate landscape at HQ level to ensure effective decision making.

Summary of industry’s views on what constitutes unreasonable behaviour:

  • For reasonable concerns of JV partners not to be anticipated and answered. For example, a buyer should not expect partners to accept a parent company guarantee from a shell company.
  • For JV partners not to undertake meaningful engagement and negotiation in line with a reasonable timetable and transaction plan. JV partners should generally coordinate responses in line with the timetable, rather than individual negotiations. The possibility of pre-emption should be raised in a timely manner, ideally as early as practical.
  • For JV partners to withhold approval of technical and/or financial capability where it has not previously been outlined and substantiated as a specific area of concern.
  • For JV partners to reject an offer without offering an explanation and/or making a counter offer.
  • For JV partners to expect open ended and unlimited deeds of guarantee to cover financial capability. There should be clarity around the terms of the deed, articulated with pragmatism to reach a meaningful agreement, and with appropriate triggers to cause the guarantee to cease. It is recognised that decommissioning costs can have a degree of uncertainty, but this should not support open ended and unlimited deeds of guarantees (without prejudice to arrangements under decommissioning security arrangements based on the OGUK industry standard).
  • For matters related to competition and confidentiality to be cited as a reason for not engaging, unless reasonable substantiation is provided and reasonable efforts are made to resolve.
  • For a lack of resource to be cited as a reason for not engaging.
  • For historic disputes (including those relating to other assets) to taint the deal on the table and which have the potential to lead to inappropriate deferment, delay or inaction.
  • For “black swan” events and extreme circumstances, or non-traditional deal constructs, to be used as a mechanism for unreasonable demands or unwarranted suspicion. Black swan events should be subject to reasonable and appropriate stress tests based on the asset (or similar asset) history and give consideration to the likelihood of it arising.