Rising costs and UK tax hike deal a death blow to North Sea oil project

The increased windfall tax in the UK on oil and gas producers’ profits combined with the rise in capital costs for the development of what is seen as one of the North Sea’s largest undeveloped oil projects have forced Parkmead Group’s hand, thus, the UK player has decided to throw in the towel and abandon its intention to develop the project.

Parkmead highlights that it has worked “extremely hard” in recent years to progress the Greater Perth Area (GPA) challenging development project with its unique set of characteristics including problems handling sour gas combined with ageing nearby infrastructure. This work covered extensive transportation, engineering, and processing studies and commercial negotiations with infrastructure owners including INEOS and the Scott area owners. Parkmead operates the Greater Perth Area in the UK Moray Firth and the Perth and Dolphin fields lie at the core of this oil hub project.

The company points out that it felt encouraged by the positive initial findings from a net-zero feasibility study, conducted in conjunction with CNOOC and Worley, which demonstrated that a technical solution was possible using the Scott platform for the reinjection of associated sour gas into a nearby depleted reservoir. According to the UK player, these studies resulted in a technically sound, Central North Sea development which could have added significant oil volumes for the UK albeit through ultra-late-life neighbouring infrastructure.

As a result, the company believes that this development plan could satisfy both MER and Security of Supply Central Obligations for the NSTA. Parkmead also engaged in detailed discussions with a number of companies active nearby and the NSTA around extending the licence to give the necessary time for submission of a revised concept select report following the completion of the net-zero studies. However, the recently updated development capital costs for Perth, including the additional costs of achieving net-zero requirements, have climbed to almost $1 billion.

In light of this, Parkmead and its advisers ran a farm-out process over several months and farm-in interest was expressed from multiple parties, subject to an extension to the current licence and other factors. During this process, concerns were highlighted over the longevity of potential nearby host infrastructure and the inability to pursue a stand-alone FPSO development option under the net-zero requirements along with industry concerns over the recent numerous fiscal changes which have led to a large increase in effective taxation. 

Furthermore, Parkmead outlines that the tax hike “materially damages project economics,” undermining the usual risk-reward equation associated with making major offshore oil and gas field investment decisions, thus, combined with a lack of public and political support for new oil projects, this has led to “a very cautious and conditional approach” from industry during the farm-out talks. The company emphasises that without full and committed engagement from industrial partners, it would not be practical to progress the Perth development to FID, particularly recognising “the massive level of capital investment required.”

Therefore, the UK player has decided not to pursue the potential Perth oil development and the P588 and P2154 licences containing the Perth discovery will not be extended. In line with this decision, the firm will record a non-cash one-off impairment of approximately £33 million (nearly $42.19 million) related to the Perth area in the accounts to 30 June 2023. Despite this, the firm confirms that it remains in “a very healthy cash position” with ongoing valuable revenues from its producing Dutch gas fields and onshore UK wind turbines. Additionally, the company has “a very significant pool of UK tax losses,” which total in excess of £150 million (around $191.65 million).

Tom Cross, Executive Chairman, commented: “Parkmead has developed a clear strategy for its future in the UK North Sea. Over recent years a great deal of our team’s effort has been directed at trying to unlock the complex Perth area. Our team is naturally disappointed that despite these huge efforts, working closely with neighbouring operating companies and highly skilled supply chain companies, the combination of challenging factors means it is not economically viable to take the project forward. However, our expert resources will now be focused on other valuable opportunities.”

At a time when the UK’s windfall tax hike on oil and gas producers’ profits is pushing multiple players to contemplate downgrading their UK portfolio or even exiting the North Sea, political tensions and uncertainties over the sector’s future are perceived as additional roadblocks to investment in domestic oil and gas. The UK North Sea upstream industry is also embroidered in unprecedented challenges associated with volatile oil and gas prices, ageing infrastructure, and rising capital and operating costs.

The plot thickens further with a lack of appetite from traditional funding sources to support oil and gas projects, as all heads turn to transition plans that move the country forward during an ever-evolving regulatory framework, which recognises the social and economic demand for viable and sustainable low-carbon and green energy. Bearing all of this in mind along with the rising inflation and cost of living crisis, the challenges the Greater Perth Area development project faces do not come as much of a surprise and neither does Parkmead’s decision to call it quits.

Given the unprecedented very high hurdles created by the current challenges, Parkmead claims that its board has taken the decision that it “must now necessarily be very careful and selective in its forward UK investment strategy.” As a result, the firm’s primary focus will be on building a high-quality portfolio of gas-producing assets and electricity generation from renewable energies, that meet the ultimate aim of net-zero. In addition, the firm will continue to work on its existing portfolio of oil and gas assets which have the potential to be developed rapidly within the UK transition phase, and also evaluate acquisition opportunities that are aligned with this strategy.

“As a balanced energy company, Parkmead will continue to progress its diverse portfolio of gas, oil and renewable energy assets in order to maximise shareholder value. We have sound and sustainable revenue from our Dutch gas fields, plus income and increasing potential from our growing renewables portfolio. This solid base onshore in the Netherlands and the UK puts Parkmead in a strong position to pursue the exciting and significant upside offshore that Skerryvore presents in the near term, and the Fynn Beauly and Fynn Andrew assets in the medium term, together with any new licences that may be awarded to Parkmead and its partners following its applications in the current 33rd UK Offshore Licensing Round,” added Cross.

Parkmead underlined that the Skerryvore area in the UK Central North Sea could be developed in a timely and cost-efficient manner despite the new fiscal and regulatory challenges. As the operator of this high-impact well, the company is planning to drill it as soon as possible since it is making progress with well planning and vessels and rig tendering. Currently, the spud date is expected during 4Q 2024. Parkmead’s partners for this prospect are Serica and CalEnergy.  

The well is targeting an estimated 157 million barrels of oil equivalent from multiple horizons on the flank of a salt diapir. As Skerryvore is surrounded by modern infrastructure, the company is of the opinion that this provides the opportunity for a number of low-cost tie-back options which, in the success case, would allow this development to proceed at pace.

Meanwhile, Parkmead is adamant about its commitment to pursuing what it sees as attractive exploration and appraisal opportunities where these have the ability to be drilled and developed swiftly within the transition period, by utilising existing nearby infrastructure with a lengthy remaining field life that meets the requirement of net-zero targets. 

Aside from extracting the maximum value from its UKCS assets, the firm still sees considerable upside value in UKCS production, thus, it continues to evaluate a number of acquisition opportunities to complement the potential of projects within its existing asset portfolio in the Netherlands and the UK.