Shell inks deal with Ithaca to offload its stake in UK’s ‘second largest undeveloped field’

UK-headquartered energy giant Shell has signed an agreement with Ithaca Energy, defining a marketing process for its interest in the controversial Cambo offshore development, which the oil major decided to exit after an internal review.

Back in December 2021, the news about Shell’s decision to exit Cambo – confirmed by its partner in the project, Siccar Point Energy – shed doubts on the future of the project, which faced fierce opposition from environmentalist groups, especially in the wake of the COP26 summit in Glasgow and widespread discussions about whether the UK should continue developing new fossil fuels projects while working to become net-zero by 2050.

This was hammered home further by Scotland’s First Minister, Nicola Sturgeon, who expressed for the first time in November 2021 her belief that the Cambo oil project should not get the green light. As a result, Siccar Point Energy made the decision in December 2021 to suspend its development of the Cambo oilfield in the wake of Shell’s exit.

However, the hope that this project may see the light of day was not extinguished, since Siccar Point Energy and Shell received a two-year extension of licences containing this field in March 2022. While the extension did not change Shell’s decision to exit the Siccar Point-operated project amid public backlash over its development in the context of the energy transition, Shell did note it would allow time to evaluate all potential future options for the project.

The plot thickened further the following month after Ithaca Energy, owned by Israeli Delek Group, made its announcement about taking over Siccar Point Energy, which holds interests not only in the Cambo field but also in the Rosebank project. This deal allowed Ithaca to take over the operatorship of the Cambo project. The company sees both Cambo and Rosebank projects as opportunities to develop fields that will contribute significantly to the UK’s energy security.

While operators of these two major oil projects located off the UK are laying the groundwork to sanction the previously delayed projects, the imposition of an additional tax on oil and gas profits by the UK government cast further doubt on the upcoming investment decisions for these projects.

In an update on Friday, 5 May 2023, Ithaca Energy revealed the agreement, which defines a marketing process for Shell’s 30 per cent working interest in the Cambo field. The company explains that a number of outcomes are possible under this agreement to enable the successful progression of the project towards the final investment decision. The available outcomes enable Shell to market and sell a portion of its 30 per cent working interest in Cambo or the entire 30 per cent stake.

If the oil major does not sell its entire 30 per cent working interest, it will be able to sell any remaining portion of its own stake, which is not sold to a third party, to Ithaca. For Shell to sell its entire 30 per cent working interest and, if a potential buyer wanted a greater share of equity, Ithaca Energy could sell up to 19.99 per cent of its working interest in Cambo.

Alan Bruce, Chief Executive Officer, Ithaca Energy, commented: “Our agreement with Shell represents a meaningful step towards the development of Cambo, the second largest undeveloped field in the UKCS and a key asset in helping maintain the UK’s future energy security. Securing a new owner for Shell’s stake is an important step in Ithaca Energy progressing to final investment decision. Ithaca Energy’s primary strategic focus is to maximise sustainable shareholder returns through the delivery of our Buy, Build and Boost strategy, including the future development of Cambo.

“Ithaca Energy remains committed to investing in the UK North Sea, however, the impact of the amended Energy Profit Levy and the fiscal instability it has created continues to constrain our ability to invest. We are actively engaging, in a constructive manner, with the UK government in pursuit of the fiscal stability required to make critical investment decisions that will support the UK’s long-term energy security.”

Moreover, the agreement provides an option for Shell to sell any remaining portion of its own stake that has not been sold to a third party to Ithaca Energy, following the conclusion of the marketing process, which will run six months from 4 May 2023. In parallel, Ithaca has an option to acquire the remaining portion of Shell’s stake, in each case subject to regulatory approval.

The company highlights that this transaction structure provides upfront certainty, with very limited near-term cash outflow, in the event that either of the two players exercises their options in relation to Shell’s remaining stake when the marketing process concludes. Therefore, Ithaca Energy has entered into the option to acquire this stake at a value equating to $1.50 per boe of the P50 resource volumes being acquired pursuant to the development plan.

In line with this, if the development consent is granted by the North Sea Transition Authority (NSTA) on or before 30 June 2024, the P50 resource volume reference will be as per the latest field development plan submitted to the NSTA, which is approximately 173 mmboe gross. On the other hand, if the development consent is granted after 30 June 2024, the P50 resource volume reference will be determined by the field development plan submitted to the NSTA at the time of development consent. 

Based on Ithaca’s statement, the potential transaction price is subject to a number of customary completion adjustments. The company will not be required to pay the vast majority of the potential transaction price until the receipt of proceeds of any subsequent sale of a working interest in Cambo by the firm or first oil.  

Aside from minor payments at completion or if Ithaca Energy subsequently sells a portion of its working interest in the Cambo field, the company elaborates that no amounts will be payable should it decide not to proceed with FID and/or if the NSTA does not provide development consent. In all sale scenarios, Ithaca underscores that it would retain at least a 50 per cent working interest in Cambo and remain as the operator of this asset.

Simon Roddy, Shell’s Senior Vice President, UK Upstream, remarked: “Following an internal review, we have decided to sell our 30 per cent working interest in Cambo and have agreed a process with Ithaca Energy for the sale of Shell’s stake in the field this year. We wish Ithaca Energy well in the future development of the field, which will be important to maintain the UK’s energy security and to sustaining domestic production of the fuels that people and businesses need.”

Located in the West of Shetland region, the Cambo field is the second largest undeveloped oil and gas discovery in the UK North Sea. It is anticipated to deliver up to 170 million barrels of oil equivalent during its 25-year operational life and would also provide a further 53.5 billion cubic feet of gas. With its modern, energy efficient design and potential for electrification, Cambo could be one of the lowest-emission intensity assets in the North Sea.

The field is expected to produce at less than half the CO₂ intensity than the average UK field, enabled by the FPSO design which includes features such as being fully electrification ready (subject to grid connection availability), zero routine flaring and the Sevan FPSO hull design reducing power demand.