UK-listed Deltic Energy on April 30 slammed the "hostile" political environment in the UK, saying it was impacting new upstream investments in the North Sea.
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Register NowIn a statement, Deltic said that as a result it had so far been unable to find a farm-out partner for the Pensacola gas discovery and also warned about its ability to access traditional equity capital to meet its share of an appraisal well planned for Q4.
Deltic has a 30% stake in the Pensacola discovery -- announced in January 2023 -- with operator Shell holding the remaining 70%.
Deltic said in March last year the Pensacola resource estimate would make it one of the largest Southern North Sea gas discoveries in over a decade.
But it has struggled to find a new farm-in partner for its stake despite its best efforts given the political environment.
The UK government in March decided to extend the 35% Energy Profits Levy (EPL) until 2029, with the overall tax on oil and gas revenues currently at 75%.
And the opposition Labour Party -- currently well ahead in the polls ahead of an election expected later this year -- has plans to raise the EPL to 38% from 35%, leading to an increase in the headline tax rate to 78%.
Also included in the Labour policy proposal is the removal of the investment allowance on the EPL, which would reduce the tax relief on capital investments to about 46% from 91.4%.
"The feedback from Deltic's Pensacola farm-out process has indicated that the continual tinkering with the 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 E&P companies to commit to long-term investments in the North Sea," Deltic said.
"This has resulted in many operators diverting capital away from the UKCS or delaying investment decisions, especially with respect to new large-scale opportunities like Pensacola," it said.
"Against this hostile political environment, and despite the company's best efforts, Deltic have not yet been able to secure a farm-out partner for Pensacola," it said.
Farm-out risk
Deltic said that although there were a number of live discussions with respect to a way forward on Pensacola, there was a risk that a farm-out may not be secured before the end of May.
"The recent difficult state of UK equity markets, especially for smaller companies, has been well publicized," it said.
"This, coupled with the impact of the political and fiscal regime on UK E&P company valuations and investor sentiment, means that the board believes that accessing traditional equity capital, as the company has successfully done in the past, is unlikely to be a viable option to allow Deltic to meet its 30% share of the Pensacola well," it said.
Deltic said it would continue to consider alternative sources of capital and non-traditional funding structures alongside the ongoing farm-out process.
But it said that if an industry and/or funding solution was not in place by the end of May, the company would be required to take steps to ensure it was 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 license and transfer its interest in Pensacola to the joint venture partners," it said.
Deltic CEO Graham Swindells said the company would continue to pursue "all avenues" to progress Pensacola.
"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," Swindells said.
"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," he said.
The warning over Pensacola comes as UK gas prices remain well down on their record highs from August 2022.
Platts, part of S&P Global Commodity Insights, assessed the UK NBP month-ahead price on April 29 at 69.09 pence/therm ($8.67/MMBtu).