FPSO Western Isles; Source: Jersey Oil & Gas

New UK player joining North Sea oil project ahead of field development plan submission

UK-headquartered Jersey Oil & Gas plc has agreed to sell a partial stake in an asset on the UK Continental Shelf (UKCS) to Serica Energy (UK) Limited, a subsidiary of Serica Energy. This will enable Serica to participate in the HitecVision-backed NEO Energy’s redevelopment project – for which a field development plan (FDP) is due to be submitted shortly – and other potential developments.

FPSO Western Isles; Source: Jersey Oil & Gas

Thanks to this deal, Serica Energy will get 30% non-operated interest in the P2498 and P2170 licenses, which together represent the Greater Buchan Area (GBA) project. While the completion is subject to regulatory, partner, and interested party approvals, it is expected to occur early in 2024. Following completion, the partners in the GBA will be NEO Energy (50%, operator), Serica Energy (UK) Limited (30%), and JOG (20%). As a result, Serica will have the option of participating in the redevelopment of the Buchan field and other potential developments in the GBA.

Furthermore, Jersey’s farm-out transaction with Serica is on identical pro-rata terms to that previously completed with NEO Energy earlier in the year. These two transactions result in Jersey retaining a 20% interest in the GBA licenses, a full carry on the capital expenditure required to bring the Buchan field into production, and a number of milestone cash payments. Upon completion of the Serica farm-out, the combined cash payments received from the two farm-outs will be over $18 million, with a further $20 million due to be paid to Jersey at the approval of the Buchan field development plan.

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In exchange for entering into definitive agreements to divest a 30% working interest in the GBA licenses, Jersey is set to receive from Serica a 7.5% carry of the estimated $25 million cost to take the Buchan field through to FDP approval; 7.5% carry of the Buchan field development costs, up to the budget included in the approved FDP; equivalent to a 1.25 carry ratio; $6.8 million cash payment on completion, which includes a $5.6 million payment associated with the finalization of the GBA development solution and the associated acquisition of the FPSO Western Isles; $7.5 million cash payment on approval of the Buchan FDP by the NSTA; and $3 million cash payments on each FDP approval by the NSTA in respect of the J2 and Verbier oil discoveries.

Andrew Benitz, CEO of Jersey Oil & Gas, commented: “We are thoroughly delighted to announce the farm-out transaction with Serica Energy. Not only does it bring a further high-quality partner into the joint venture, but it unlocks exceptional value for the company and delivers upon our overall objectives for the GBA farm-out strategy. The transaction provides JOG with multiple cash payments, but most importantly, a fully funded 20% working interest in the Buchan redevelopment project, transforming the company and providing us with the springboard from which to realize long-term shareholder value.”

While the GBA encompasses several oil and gas accumulations some 150 km north-east of Aberdeen, in the Outer Moray Firth, the largest of these accumulations is the Buchan field which produced for over thirty years, ceasing production in 2017 owing to the end of the useable life of the floating production facility. The concept select report submitted to the NSTA for the redevelopment of Buchan is based on a new production hub located at the Buchan field, utilizing the FPSO currently operating on the UK Western Isles fields and planned to come off-station in the second half of 2024.

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Moreover, a phased development is envisaged involving the redevelopment of the Buchan field in Phase 1 and the possible development of the J2 and Verbier discoveries in Phase 2. Mid-case contingent resources from the Buchan field alone are estimated to be in the region of 70 million barrels of oil equivalent, making it the third largest pre-development field in the UKCS. There are other discoveries and prospects in close proximity that might provide additional tie-back opportunities to the FPSO. The NSTA has issued a no-objection letter following the submission of the concept select report in support of the Buchan redevelopment program.

A proposed FDP for Buchan is expected to be submitted to the NSTA shortly, with approval of the FDP potentially in the second half of 2024. In addition, the development concept includes limited work on the FPSO to prepare it for redeployment. This work covers the installation of water injection booster pumps, produced water injection modifications, and preparation of the vessel for future electrification. Following the recent Innovation and Targeted Oil & Gas (INTOG) license awards, there is the possibility of third-party floating wind power developments located close to the GBA.

The FPSO is expected to be connected to one of these, should they become available. Oil export is planned to be via shuttle tankers. While the timeline is subject to project sanction and regulatory approval, the first production is currently slated for late 2026 and peak production rates are expected to be around 35,000 barrels per day. The gross development costs estimated to be in the order of £850-950 million are expected to qualify for tax relief at a rate of approximately 91% under the current fiscal terms, bringing into production over 70 million barrels of oil equivalent (95% oil).

Mitch Flegg, Chief Executive of Serica, remarked: “We are delighted with this transaction which gives Serica a significant interest in the proposed Greater Buchan Area project, potentially adding a third production hub and further resilience to Serica’s North Sea portfolio. In common with our other hubs, the GBA plan involves utilizing existing infrastructure – in this case an FPSO – with the possibility of exploiting multiple accumulations in the area. Moreover, the development has been designed to deliver an industry-leading low level of carbon emissions, consistent with Serica’s objective of reducing the overall carbon intensity of its activities.

“The transaction demonstrates the benefits of Serica’s strong balance sheet. Our financial strength enables us to take advantage of suitable opportunities to expand the portfolio and we will continue to take a very proactive approach to business development, while also investing in our existing portfolio and paying dividends to shareholders. The transaction is structured such that most of the consideration payable by Serica is contingent and linked to making progress in the project. Our participation will also be financially efficient with Serica benefiting from tax reliefs on its investment.”

According to Jersey, all the main components of the Buchan redevelopment plan have now been defined. The field will be developed through the use of up to five subsea production wells, supported by two water injection wells tied back to the FPSO, which will be modified to be electrification-ready prior to redeployment to the field. 

The company confirms that work is progressing on the front end engineering and design (FEED) studies that require completion ahead of FDP approval and the development moving into the execution phase of activities. Jersey believes that the farm-out will unlock the route to monetizing total estimated GBA resources in excess of 100 million barrels of oil equivalent.