UK’s political and fiscal regime hampers Deltic’s ability to fund its share of appraisal costs for North Sea discovery

AIM-listed natural resources investing company Deltic Energy is still on the lookout for a farm-out partner to ensure that its share of costs will be secured for the appraisal of a gas discovery in the Southern North Sea, which Shell, a UK-headquartered energy giant, operates.

After Shell made a gas discovery at the Pensacola gas prospect in license P2252 at the start of 2023, the company worked to develop an appraisal strategy for the discovery and hired the Valaris 123 jack-up rig to spud the Pensacola appraisal well in 2024. In a bid to meet its share of funding requirements, the oil major’s partner, Deltic Energy, embarked on a farm-out process.

According to the company, its Pensacola farm-out process has indicated that the continual tinkering with the Energy Profits Levy (EPL) and resultant fiscal uncertainty created by the current government, along with recent rhetoric emanating from the Labour Party, have had “a severely negative effect” on the ability of UK exploration and production (E&P) companies to commit to long term investments in the North Sea. 

As a result, the AIM-listed player explains that many operators are diverting capital away from the UK Continental Shelf (UKCS) or delaying investment decisions, especially concerning new large-scale opportunities like Pensacola. Against such a political backdrop and despite its efforts, Deltic has not yet secured a farm-out partner for Pensacola.

While the firm claims that several discussions are ongoing regarding a way forward for Pensacola, there is also a risk that a farm-out may not be secured before the end of May 2024, thus, the company is willing to engage with additional potential partners.  

Graham Swindells, Chief Executive of Deltic Energy, commented: “The struggle to find a way forward on a project like Pensacola, which is one of the largest discoveries in the North Sea in recent decades, is a real-world consequence of our political leadership using the nationally important oil and gas industry as a political football at a time when energy security is of paramount importance.  

“Given the impact of fiscal and political uncertainty on investment decisions we have seen a shift away from investment in larger standalone projects, like Pensacola, towards more affordable, lower risk opportunities which defer decommissioning or increase infrastructure life such as Selene, and the company’s Syros prospect in the Central North Sea, where we have seen an enhanced level of interest.”

Considering the recent state of Britain’s equity markets, coupled with the impact of the political and fiscal regime on UK E&P company valuations and investor sentiment, Deltic’s board is convinced that accessing traditional equity capital, as the company has done in the past, is unlikely to be a viable option to allow it to meet its 30% share of the Pensacola well.

This is estimated to be roughly £15 million (over $18.8 million) net to Deltic. However, the AIM-listed firm will continue to consider alternative sources of capital and non-traditional funding structures, alongside its ongoing farm-out process, to mitigate costs and/or secure its equity position in the Pensacola well. 

“If an industry and/or funding solution is not in place by the end of May 2024, being the point at which Deltic will be required to demonstrate its capacity to fund its share of costs, Deltic will be required to take steps to ensure the company is not exposed to further expenditure on the Pensacola well if there is no reasonable expectation that the company will be able to meet those additional liabilities which will be incurred going forward. In such circumstances, Deltic will be required to withdraw from the Pensacola licence and transfer its interest in Pensacola to the joint venture partners,” explained the AIM-listed player.

Following a commitment to the Pensacola appraisal well in December 2023, Deltic confirms that operational planning for the well has continued to progress according to plan, with long lead items being ordered in anticipation of drilling the well. In addition, the geophysical site survey over the proposed well location has been completed and the final geotechnical site survey is scheduled to take place in May/June 2024.

The Valaris 123 heavy-duty jack-up rig will drill both the Selene exploration well and the Pensacola appraisal well, with the latter due to be drilled immediately following the completion of operations at the former. This rig is currently operating in the Central North Sea, following which it will move to Selene.

The Pensacola well, which is subject to the timing of the completion of Selene, remains on track to be drilled in 4Q 2024. Deltic recently wrapped up a farm-out agreement with Dana Petroleum for a 25% interest in Shell’s license P2437, containing the Selene prospect.

“We look forward to the start of drilling operations on the high impact Selene exploration well, in which Deltic is fully carried for the estimated cost of the success case well, which remains due to spud in July 2024. In the meantime, we will continue to pursue all avenues to progress Pensacola and will update the market in due course,” added Swindells.