Acquisition Overview
Equinor, an international energy company headquartered in Norway, has agreed to buy the UK’s oil and gas business of Canada’s Suncor Energy for $850 million (£710 million.) The deal includes a 29.9% stake in Buzzard oilfield, an additional 40% stake in the Rosebank development, and will also see the Norwegian firm taking on Suncor’s UK-based employees who work with these assets. Equinor is already an operator of the offshore Rosebank oil and gas project, one of the largest developments in the North Sea basin. Equinor’s acquisition of Suncor UK doubles its stake in the development to 80%, while UK-based Ithaca Energy holds the remaining 20%. In this way, this deal is part of a clear commitment by Equinor to optimise its oil and gas portfolio, deepen its position as a reliable energy provider in Europe generally and the UK specifically, and continue to deliver on its ambition to become a net-zero company.
Deal Structure
Equinor, using its vast profit from last year’s flat-out production and soaring gas prices, has financed this transaction through cash. The transaction includes non-operated stakes in the producing Buzzard field (29.9%) and the Rosebank development (40%). Rosebank is being developed in line with the UK Government North Sea Transition deal and the Rosebank partners are targeting a final investment decision (FID) in 2023, subject to the UK government’s and partner’s approval. As such, Equinor has said that $250 million of the $850 million deal is contingent upon reaching FID for Rosebank later this year. Equinor remains a listed company.
Suncor Energy UK overview
Suncor is a Canadian integrated energy company based in Calgary, Alberta that specialises in the production of synthetic crude from oil sands. Created by Sun Oil in 1979, Suncor is a merger of its Canadian conventional and heavy oil companies, the Sub Oil Company Limited, and the Great Canadian Oil Sands Limited. In turn, Suncor’s UK offshore portfolio, headquartered in Aberdeen, focuses on large low-cost resources including joint venture production and development projects. As noted above, these development projects take the form of the Buzzard field (the largest oil field discovered in the UK North Sea in the past 20 years that delivers more than 22,000 high-margin, low-cost barrels per day to Suncor) and the Rosebank project (a UK North Sea pre-sanction project operated by Equinor that was discovered in 2004 and remains the best and largest remaining undeveloped resource in the UK.) Accordingly, in terms of future potential, Equinor UK is capable of adding volumes of reserves of oil, approximately 15,000 per day in equity share in 2023, through the already active Buzzard field and the imminent Rosebank project that are material to the energy needs of the UK.
Founded: 1979
Number of employees: 21,126 (2021)
EV: $55.51Bn
LTM Revenue: $42.56Bn
LTM EBITDA: $18. 41Bn
Market Cap: $42.34Bn
Industry insight
The energy industry is undergoing significant change as the world seeks to transition to more sustainable sources of energy in order to reduce carbon emissions, as well as react to the consequences of both COVID-19 and Russia’s invasion of Ukraine.
Geo-political disruption to energy supply chains: the conflict between Russia and Ukraine has raised concerns about the security of energy supply chains in Europe. Russia is a major supplier of natural gas to Europe, and the disruption of these supplies has seen Russian gas – critical for heating, industrial processes, and power - cut by more than 80% this year. In turn, Europe races to find energy replacements to fill the Russian supply void. Needless to say, as a consequence of this energy shortage, oil and natural gas prices have reached record highs. The conflict has also raised questions about the reliability of Russian energy exports, as well as the vulnerability of pipelines and other energy infrastructure.
Impact of COVID-19 on energy demand: the COVID-19 pandemic has had a significant impact on energy demand, as lockdowns and travel restrictions led to a sharp decline in demand for oil, gas, and other energy production. Following the lifting of lockdown measures, some sectors experienced an uptick in demand while others continued to struggle. Thus, whilst there was certainly an increase in demand for oil and gas, the energy demand has been uneven across different sectors and regions – for example, aviation has been slower to recover leading to lower demand for jet fuel and gasoline. The pandemic has also accelerated the shift toward renewed energy systems and diversified energy sources.
Growing demand for renewable energy: the shift towards renewable energy sources is a major trend in the energy industry, driven by concerns about climate change and the need to reduce carbon emissions. Renewables, including solar and wind power, are becoming increasingly cost-competitive with traditional energy sources such as oil and gas. In recent years, more countries have made public declarations of carbon emission reductions – President Biden has set a goal for the US to reach net zero by 2050, and the EU has similarly agreed to reach net zero emissions by 2050 with an intermediate reduction of 55% from 1990 levels by 2030. Both Equinor and Suncor have also released statements aiming to be at net-zero emissions by 2050.
In conclusion, the energy industry is dealing with a multitude of diverse problems. It must seek to balance the energy supply and demand caused by COVID-19 and Russia’s invasion of Ukraine, whilst also focusing on reducing carbon dioxide emissions and shifting towards more renewable energy systems.
Strategic rationale
Since Moscow’s invasion of Ukraine a year ago, Equinor’s importance to Europe has never been greater as the region seeks alternative sources of energy. As such, the firm is now using its vast profit from last year – a result of soaring gas prices – to boost its capacity to provide energy to the vacuum in the region. Accordingly, Executive Vice President for Exploration and Production Philippe Mathieu said in the statement detailing the Suncor UK acquisition that Equinor is “building on our longstanding position as a broad energy partner to the UK, strengthening our position as a reliable energy provider in Europe.” In this way, having supplied 29% of the UK’s natural gas demand last year, Equinor is aiming for a “deepening in our core countries.” Furthermore, having bought at a time in which the price for a barrel of oil remains high (around $92/barrel in 2023 in comparison to the recent 5-year average of $60/barrel), this acquisition constitutes a good return on investment that will benefit stakeholders immediately – particularly given that the Buzzard field is already in operation.
Concerning the Rosebank development, Equinor’s deal ensures the company will have access to oil reserves for years to come as the development looks to begin operation in 2026 and, when in motion, is predicted to account for approximately 8% of the UK’s oil production. Accordingly, Equinor’s acquisition of Suncor UK ensures that the Norwegian multinational energy company has plentiful oil supplies in the UK both in the short term (Buzzard) and long term (Rosebank). In turn, this will enable Equinor to be considered a reliable energy source to Europe – this being especially important given Russia’s current irregular supply. On the low-carbon side, both Buzzard and Rosebank have electrification initiatives underway – something that has never been done in the UK, but something Equinor has achieved in the past in Norway. As such, Equinor’s increasing UK portfolio is in line with the energy company’s aims to shift towards more renewable energy sources and deliver on its ambition of becoming a net-zero company.
For Suncor UK, there are many possible factors at play in its signing of a share purchase agreement with Equinor UK. One reason is that Suncor Energy has been looking to streamline its operations and focus on its core assets, such as oil sand operations in Canada. The company has recently made several divestitures, including the sale of its Petro-Canada lubricants division, and it is possible that the UK business was similarly deemed non-core. Another reason is that the UK oil and gas market conditions have been increasingly difficult in the last few years: low oil prices during COVID-19, increased regulatory pressure, and some geopolitical uncertainty following Russia’s invasion of Ukraine. These facts have made it difficult for companies to maintain profitability in the region. As such, it is possible that Suncor Energy thought it best to mitigate risks by exiting the European market altogether and refocusing on markets that offer more favourable conditions for growth and profitability. Furthermore, maintaining a clear emphasis on its main business, oil sand operations in Canada, may ensure that Suncor generates better financial returns in the long term that increase financial value for both Suncor and its stakeholders.
Ultimately, it is clear that both Suncor and Equinor stand to benefit from this transaction. Suncor will be able to focus on its core assets in Canada and reduce its exposure to challenging market conditions in Europe. Equinor, on the other hand, will gain access to a portfolio of valuable oil and gas assets in a region in which it is actively seeking to grow its operations.
Long term prospects
Overall, the sale of Suncor’s UK Exploration & Production business to Equinor UK Limited marks a significant development in the UK energy sector. While it comes amid a backdrop of operators rolling back North Sea spending as a consequence of the UK’s introduction of energy profits levy (EPL) in March 2022, this deal proves Equinor’s commitment to becoming a salient energy supplier to both the UK and Europe. Accordingly, both the Buzzard and Rosebank project (the latter being a particular lightning rod to oil and gas protestors) will provide a real contribution to energy security in the UK, particularly given Equinor’s past history and future commitment to operating the project at the lowest possible emissions. And, given Equinor’s successful oil ventures in Norway which produce steady and predictable cash flows year on year, all factors point to a successful management of the Buzzard and Rosebank projects. Nevertheless, Equinor will have to continue to navigate the many disruptions present within the energy industry: geo-political uncertainty in Europe, the UK’s energy profit levy, and rising concerns about climate change. It will be interesting to see how the deal plays out in the coming months, particularly in the context of Rosebank’s imminent FID, and to consider what impact it has on the wider UK energy sector.
Written by Felicite Baroudel (The Queen’s College, University of Oxford)
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