Since the beginning of 2023, state owned energy companies in the Middle East Region have been posting record oil revenues, buoyed by favourable regional dynamics, the windfall of historically high oil prices in the first quarter of 2022, some of the lowest lifting costs per barrel in the world, and an ever increasing global demand for hydrocarbons.

These macro factors have contributed to a climate of extraordinary fiscal growth by Middle East state owned oil giants which has, in turn, resulted in abundant capital reserves being committed to unprecedented levels of investment. This deep liquidity, combined with intensified government led mandates to increase daily oil and gas production capacities by some of the world's largest national oil companies (NOCs) are drivers of an emerging trend in deal activity from the region - outbound and cross-border transactions with a particularly strong focus on upstream asset acquisitions of onshore and offshore drilling rigs and international drilling, engineering and oilfield services businesses. Against this backdrop, many of the transactions in this landscape have, in our experience involved and, in our opinion, will continue to target either an asset or corporate with a nexus to Scotland (legal or operational), by virtue of being a jurisdiction known for its proliferation of world class energy services companies and abundance of offshore drilling rig assets operational in the North Sea.

The Middle East Region's largest energy producers are not only investing with an aim to increase production, but they are also targeting the acquisition of premium quality upstream oilfield assets and oil and gas companies in a strategic effort to accelerate the enhancement of in-country technical capabilities, realise a competitive increase in shareholder returns, achieve a heightened profile of greater market share of operational assets (such as becoming the world's largest rig fleet owners), and also strive to nationalize and transfer to state owned drilling companies the in-bound capabilities and proprietary skills of international oilfield service providers. All of these initiatives are reflected in the activities of publicly listed drilling giants in Saudi Arabia and the United Arab Emirates who are fast tracking the expansion of their operational fleets with the acquisition of premium offshore jack-up drilling rigs, offshore accommodation vessels and onshore land drilling rigs.

The upward trajectory in international deal activity by the Middle East Region's integrated energy clients (public and private) has resulted in a marked increase in the volume of jurisdiction specific buy side acquisition transaction diligence from a Scots law perspective where the proposed transaction (whether share or asset focused) involves a nexus to the North east. When corporate buyers are contemplating international acquisitions of Scottish incorporated or based businesses, upstream exploration and production assets held in Scots law structures or targets with operations in Scotland, there are key factors to be aware of that are not only jurisdictionally specific, but also unique to businesses involving hydrocarbons.

Where the targets are oilfield assets, any proposed transaction which seeks to invest in onshore land or offshore jack-up drilling rigs, must carefully scrutinise whether:

  1. Conditions Precedent: the asset sale and purchase agreement requires the drilling units to be in "inspection condition", in class, compliant with the buyer's rig acceptance criteria, insurance (including insurance assignment), total loss / sale of rig covenants, whether the rigs will be acquired individually or as a cluster, and sanctions compliance;
  2. State of the Drilling Rig Units: modifications (minor or major) are required for the rig to conform to the buyer's operational requirements. Modifications, whether forming part of scheduled maintenance or to make the rigs compliant with the buyer's required technical specifications, speak to value of the asset and are a crucial consideration;
  3. Operational Status of the Rigs: the drilling units are currently under contract with another operator, warm-stacked at the port or cold-stacked on the beach;
  4. Existing Contracts & Backlog: the current rig operators are party to drilling contracts and whether the seller, rig operators and buyers intend for the operator to continue during any contract transition period as well as any accumulated contract backlog;
  5. Assignment & Novation: the existing drilling contracts will be assigned and novated to the buyer's nominated corporate opco or terminated pending international mobilisation;
  6. Inventory Purchase: the inventory (other than mandatory equipment which runs with the rig) used in connection with the operation and maintenance of the drilling unit will be acquired by the buyer;
  7. Liabilities and Risk Allocations: liability and indemnity allocations concerning events giving rise to claims on or after the agreed closing time and the final delivery location, acceptance and transfer of risk and title in the unit;
  8. Bareboat Chartering: the asset owning company will bareboat charter the rigs (in the case of offshore vessels) to the buyer for subsequent onward third party rental to the buyer's opco clients;
  9. Mortgages & Liens: securities attach to the drilling rig units and the order of first priority;
  10. Employee Transfer: personnel will or will not be assigned and such matters governed by an employee matters agreement in connection with the asset sale and purchase agreement.

As leading experts in Scotland in transacting international deals that encompass all of the major purchase and divestment structures in the oil and gas marketplace, Brodies LLP has one of the largest dedicated M&A teams in the market.

In the Middle East Region and internationally, at Brodies Middle East LLP, we are particularly sought after by our clients for our deep understanding of the entire operational life of a drilling unit and deep technical knowledge of the core business of the world's leading and largest drilling and oilfield services contractors.

Testament to those capabilities, we have been, and look forward to continuing to enjoy the role of trusted Scots law counsel to leading corporates and white shoe, magic and silver circle law firms with strength, depth of resource and subject matter expertise across all practice disciplines involved in upstream oil and gas transactional work.

Contributors

Greg May

Partner