Shell’s North Sea gas discovery seen as ‘regionally significant hydrocarbon accumulation’

A recent competent person’s report (CPR) of Shell’s North Sea discovery has illustrated the commercial potential of the discovery for the UK-headquartered energy giant’s partner, Deltic Energy, based on two potential development scenarios, including a combined gas and oil development and a gas-only option.

At the start of 2023, Shell made a gas discovery at the Pensacola gas prospect in the Southern North Sea, which is perceived to be the largest natural gas discovery in the North Sea in over a decade. The oil major recently approved the 2024 work program and budget that allows for the drilling of the Pensacola appraisal well in late 2024. The site survey works focused on this appraisal well location are due to be carried out in the first half of 2024 while the rig tendering process is ongoing.

The 41/05a-2 well targeted the flank of the Pensacola structure proving the presence of thinner flank dolomites sourced from the erosion of dolomites deposited up-dip over the crest of the structure. Deltic underscores that a thicker, better quality reservoir is predicted to be present updip while the properties of the dolomite reservoir over the crestal part of the field are one of the main uncertainties in the estimate of both hydrocarbons in place and contingent resources for Pensacola.

Following the completion of the post-well analysis of data collected by the 41/05a-2 discovery well, Shell’s partner, Deltic Energy commissioned RPS Energy to undertake a technical review of the volumes and a commercial review of the Pensacola discovery. The AIM-listed player presented the results of the CPR for the Pensacola discovery on Licence P2252 on Friday, January 19, 2024.

Before the drilling of an appraisal well, RPS estimates the Pensacola structure to contain gross P50 hydrocarbons initially in place of 326 MMboe, in line with Deltic’s previous estimate of 342 MMboe. As several uncertainties concerning the potential development of the oil volumes discovered at Pensacola remain, Shell’s partner provided RPS with two possible development scenarios.

The first one is a combined oil and gas development requiring two separate production platforms and six horizontal wells – three gas and three oil producers – with hydrocarbons exported to Teesside via a new pipeline. The second option is a lower capex gas-only development scenario comprising three horizontal development wells producing via a normally unmanned installation exporting gas through a new pipeline to Teesside.

Furthermore, capital and operational costs for both scenarios were estimated for Deltic by S&P Global and reviewed by RPS as part of the CPR process. While RPS Energy calculates 2C contingent resources, net to Deltic, of 21.8 MMboe in the combined case and 15 MMboe in the gas-only case, the company estimates a 2C post-tax NPV10 of $205 million net to the AIM-listed firm in the combined case and $199 million in gas-only case, based on the two development scenarios assessed.

Graham Swindells, Chief Executive of Deltic Energy, commented: “RPS’s validation of our technical assessment of the Pensacola discovery is another step forward for Deltic as we progress towards drilling the appraisal well in late 2024. In particular, we are pleased with the potential valuation that RPS ascribe to the discovery net to Deltic, particularly within the context of our current share price.”

While the gas-only scenario assumes significantly lower capital expenditure than that required to support the combined oil and gas development, it also recovers fewer hydrocarbons than the combined case development. These project NPV10 valuations equate to approximately 169p – 174p per Deltic share. Shortly after the CPR, the North Sea Transition Authority (NSTA) released summary well information for the Crosgan Zechstein appraisal well drilled in early 2023 by ONE-Dyas, with its JV partner, Shell. 

Located approximately 60 km to the east of Pensacola, Crosgan is said to be highly analogous to the Pensacola discovery. The appraisal well 42/15a-4 drilled on the crest of the Crosgan reef structure is reported to have encountered a Hauptdolomit reservoir that was 140 m thick and which flowed at a maximum rate of 26.5 MMscf/day on test. 

“These positive well results further support Deltic’s view that a thicker, higher quality reservoir is likely to be present across the crest of the Pensacola structure. The information from the Crosgan offset well will be considered in future volumetric reviews along with additional information collected during the drilling of the Pensacola appraisal well later this year,” explained the AIM-listed firm.

Moreover, Deltic, which continues to work on many potential options to realize value and mitigate exposure to future drilling expenditure on Pensacola and another Shell-operated prospect called Selene, has revealed a receipt of “a significant level of interest.”

“It’s clear that Pensacola is a regionally significant hydrocarbon accumulation and we will continue to work with our partners at Shell and ONE-Dyas to mature the opportunity and optimize the potential development scenarios as we go forward,” added Swindells.