BP Defers Rhum Work, Owing to US Sanctions (Update)

(Adds BP's own statement, and an analyst's comment, at end)

BP has put off work on the North Sea Rhum gas field that it co-owns with Iranian state NIOC, because of concerns over US sanctions against Iran.

“BP has decided to defer the commencement of work on the R3 well while the position relating to US sanctions is being clarified,” said UK independent Serica May 22.

Serica had been scheduled shortly to complete its ‘BKR’ acquisition of BP’s interests in Rhum and two other gas fields (Bruce and Keith) in a £300mn ($403mn) deal, but acknowledged May 9 that US plans announced the previous day to reimpose sanctions on Iran meant it was re-evaluating the deal. The three fields together, at 100% equity, produce 5% of the UK’s indigenous gas production.

Nonetheless Serica insisted: “Progress on the transition arrangements, under which Serica will take over from BP as operator of the fields on completion of the transaction, is on schedule.

“As a result of the interest held by [N]IOC, Rhum operations are affected by US sanctions and, in particular, the new sanctions regime announced by the US government on May 8,” added Serica.

“Certain services in support of Rhum field operations are currently provided under authorisations obtained from the US Office of Foreign Assets Control (Ofac).  The current Ofac licence issued to BP enabling the provision of goods, services and support by certain US persons, expires September 30 2018. Applications have been submitted to Ofac by BP and Serica for a renewed licence beyond that date. Meetings are scheduled to take place with Ofac in the next few weeks," Serica continued.

“Serica and BP are both committed to resolving the issue of US sanctions as they apply to Rhum with a view to enabling a timely completion of the BKR transaction in 3Q 2018 and safeguarding ongoing operations.  The deferral of work on the R3 well, pending resolution of the sanctions position, is not expected to impact the long-term recovery of Rhum reserves, nor the completion of the BKR transaction.”

BP itself later commented: "BP has decided to defer some planned work on the Rhum gas field in the North Sea while we seek clarity on the potential impact on the field of recent US government decisions regarding Iran; Rhum is co-owned by an Iranian company. BP always complies with applicable sanctions. BP agreed in November 2017 to sell its 50% interest in Rhum and other assets to Serica Energy and both companies remain committed to completion of the transaction. BP and Serica are now in discussion with the UK and US authorities to better understand the situation and steps that may be required to ensure continued operation of Rhum."

Analysts at Cantor Fitzgerald said this deferral was actually good news as it "creates more long term value for Serica. The deferral means that the actual future revenue from the production uplift paid away to BP (by means of the effective royalty) will now be less, as the royalty tapers down over the coming years. Consequently, we see the recent weakness offering an opportunity for investors to buy in at an even more attractive point to a low risk producer that is both profitable and cash generative with material production."