Deltic Energy PLC (AIM:DELT) today confirmed that it, alongside Shell PLC (LSE:SHEL, NYSE:SHEL), has made a significant new gas discovery in the North Sea.
What’s the story?
The Shell-operated Pensacola well has been successfully tested, with gas flows in line with pre-test expectations and significantly the well data confirmed an estimate of 302bn cubic feet of recoverable resources.
It is described as the largest new gas discovery in the North Sea for over a decade.
The well test was undertaken in a ‘down dip’ location in the Pensacola structure and flowed initially at peak rates of 4.75mln cubic feet per day, declining to 1.75mln after twelve hours, and the company highlighted that production wells at the project would be drilling more centrally and would as a result see higher rates.
Deltic said its share of well costs are expected to total around £11.1mln.
What it means
There’s new source of valuable and relatively easy to monetise gas in the UK.
Not only is it the North Sea’s largest new discovery, it is probably amongst the best timed given the urgency of demand for domestic resources and the commercial value of nearby, low-transit cost gas supplies to UK industry and households.
For Shell, it is a boon not only as a value-creation exercise but it is likely that a subsequent development of Pensacola will, under the UK’s Energy Levy rules, generate tax reliefs to offset higher taxes across the British operations.
At Deltic it is validation of the small-cap firm’s approach – which, so far, is about picking up low-cost early stage projects, partnering with larger firms which will lead projects, test with drilling, and then, in the fullness of time, lock in created value through transactions.
The company today said it would now consider all options for its 30% interest in Pensacola including its participation in future appraisal and development programmes and/or a partial or full sale of its stake in the discovery.
What the market says
Investors obviously reacted positive to the small-cap firm’s news, with the share price jumping more than 20% higher in Wednesday’s early and mostly held onto the gains – at around 15:00 the AIM share was up 9.7% changing hands at 2.96p.
What they say?
Chief executive Graham Swindells understandably described himself as “very happy” when he checked in with the Proactive studio.
Speaking to Proactive, Swindells further noted that Pensacola could be the first discovery in what could become a larger gas play in the North Sea.
What comes next
The Pensacola discovery well will now be plugged and abandoned, as planned.
In due course, the drill campaign continues with Shell set to next drill the Selene exploration well.
Deltic owns more of Selene retaining a 50% stake in the well following its farm-out deal with Shell, which sees the oil major committed to paying up to 75% of the drill costs (up to US$25mln). The well will, according to previous estimates, target between 66mln to 290bn cubic feet of potential gas resources.
Back at Pensacola, Shell and Deltic will integrate the well data into geological and commercial models to mature plans for the onward appraisal and development of the new discovery – given the current climate and the tax incentives for new investments, one could assume the project may possibly be progressed on an accelerated basis.
Investors will eye eagerly news regarding plans for the next operations at Pensacola, how much will be done and what level of participation the company can uphold.