February 28, 2018 / 4:24 PM / 9 months ago

Exclusive: Repsol working with BofA-Merrill Lynch to sell UK North Sea fields - sources

LONDON (Reuters) - Spain’s Repsol has asked Bank of America-Merrill Lynch to value its energy portfolio in the North Sea as it considers leaving a troubled joint venture with China’s Sinopec, two banking sources said.

FILE PHOTO: A view shows the headquarters of Spanish oil major Repsol in Madrid, Spain, February 25, 2016. REUTERS/Juan Medina/File Photo

Repsol Sinopec Resources UK was formed in 2015 as part of the Spanish producer’s $8.3 billion acquisition of Canadian oil and gas company Talisman Energy, which held the North Sea assets in a joint venture with Sinopec.

Sinopec and its Canadian subsidiary Addax Petroleum had spent $1.5 billion for a 49 percent stake in the joint venture with Talisman, a sum they later said was too much.

A year after Repsol stepped in, Sinopec served the Spanish group with an arbitration notice, arguing Addax had overpaid for the assets back in 2012 and demanding around $5.5 billion in compensation.

Repsol has dismissed the claim as baseless. But the dispute has not been resolved and a ruling by an international arbitration court in Singapore is expected at the start of 2019.

“It is a tough sale because of the arbitration, but also the maturity of some of the fields, which could affect the valuation,” one banking source said, adding that the dispute with Sinopec is one of the reasons that led Repsol to decide it wants to sell the portfolio.

Repsol has divested more than $5 billion in assets over the past two years to generate cash to help restart investment and refocus its portfolio. Earlier this month, it agreed to sell its 20 percent stake in Gas Natural to CVC Capital Partners for 3.82 billion euros ($4.69 billion).

Repsol and Bank of America-Merrill Lynch declined to comment. Sinopec was not immediately available to comment.

The North Sea joint venture has interests in 52 oil fields, operating 41 of them, and has 12 offshore installations and two onshore terminals.

After entering the venture three years ago, Repsol booked a $2 billion writedown on the UK North Sea assets because the portfolio was loss-making and had many mature fields with very high extraction costs.

It has since invested another $1 billion in the project, reduced the lifting cost and increased output. In 2017, the business was cash flow positive.

Oil output from the North Sea has more than halved since its peak of almost 3 million barrels a day at the turn of the century. Production has rebounded slightly in the past couple of years as new projects authorized before the 2015 oil price crash have come on stream.

Projects ramping up from 2017 will make 2018 the best production year for the area since 2010, with oil and gas output expected at 1.9 million barrels per day, according to energy consultancy Wood Mackenzie.

The North Sea has seen a flurry of deals in recent years, including Royal Dutch Shell’s $3.8 billion sale of assets to private-equity backed Chrysaor, as longstanding operators make way for a new generation of smaller firms focused on squeezing more profit out of old assets.

Tax breaks for companies operating in the UK North Sea, off the northeastern coast of Scotland, have attracted private equity backed buyers such as Neptune Energy and Siccar Point Energy to snap up unwanted assets from major energy producers.

Britain is introducing tax changes in a bid to spur new investment in the aging basin. Starting from November 2018, tax history for oil and gas fields will be transferable from seller to buyer, allowing buyers to benefit from larger tax reliefs when fields reach the end of their life and require dismantling, a process known as decommissioning.

Reporting by Clara Denina; additional reporting by Jose Elías Rodríguez in Madrid and Ron Bousso in London; editing by Philippa Fletcher

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