Serica production in-line as it seeks tax clarity

UK North Sea-focussed upstream oil and gas company Serica Energy updated the market on its recent operations on Monday, reporting that the North Eigg exploration well ‘3/24c-6B’ had been drilled to a total depth of 16,728 feet in the Jurassic Heather formation.

The AIM-traded firm said initial analysis indicated that, while the well had encountered hydrocarbons, commercial quantities had not yet been established.

At the well location, the objective sands were thinner than had been prognosed, but a total of 16 feet of hydrocarbon-bearing sands were encountered, and those had confirmed the presence of hydrocarbons at a deeper depth than in the adjacent producing Rhum field.

“A full suite of wireline logging data has been acquired and our analysis is ongoing,” the board said in its statement.

“We aim to determine if a future sidetrack location can be designed to better evaluate the volumes of hydrocarbons in this new discovery.

“It is our intention that the well will be suspended pending the results of this further work prior to future potential re-entry and sidetrack.”

Final well costs would not be known until after the rig is off-hire, but the company said it was likely that the net after-tax cost of the well to Serica would be around £13m.

Serica’s production performance in the second half of 2022, meanwhile, continued to benefit from the investment programmes that the company had continually undertaken since the acquisition of interests in Bruce, Keith and Rhum in 2018.

Its net production for the year-to-date had averaged 25,955 barrels of oil equivalent per day, and full-year 2022 production was expected to be within the existing guidance range of 26,000 to 28,000 equivalent barrels per day.

Production continued to be more than 85% gas, the board confirmed.

Commodity prices, particularly for gas, remained “strong” during the second half, although somewhat lower in October and November.

Due to Serica's increasing financial strength, the firm said it had not entered into any new gas price hedging since July last year, and had no immediate plans to do so.

“Serica continues to hold a modest remaining hedging programme with less than 20% of gas production covered in the second half of 2022, thereby allowing the company to benefit from full market prices on over 80% of its production.

“The existing gas hedges will reduce to zero during the next 12 months.”

At the start of 2022, Serica held hedges covering a total of 146 million therms, which would have dropped to less than 32 million therms by the end of the year.

Margin call requirements on these hedges stood at more than £300m earlier in the year, but had now reduced to “significantly below” £100m.

Looking ahead, Serica said it was continuing to provide “responsibly sourced gas” to the UK domestic market, protecting security of supply and reducing reliance on higher carbon-intensity imports, as part of its transition to a lower-carbon future.

It said it would continue to invest in its assets to maintain production levels and provide jobs.

The board said the recent action by the UK government to increase the marginal rate of tax on the UK upstream oil and gas sector to 75%, with no floor to prices, would make it “challenging” for the industry to invest in new longer-term UK Continental Shelf projects, but added that it was “committed” to expanding its portfolio through mergers and acquisitions.

“Although the North Eigg exploration well has not delivered the result we had hoped for, it has demonstrated the presence of hydrocarbons and provided a huge amount of high-quality data,” said chief executive officer Mitch Flegg.

“In particular, the presence of hydrocarbons at deeper than expected depths will lead to a re-evaluation of both North Eigg and South Eigg.

“Elsewhere, our production performance has been strong, and we will continue to invest in our existing portfolio in order to maintain this performance.”

At the same time, Flegg said that as a “significant” North Sea operator, Serica would continue to “selectively review” new potential projects to maintain its North Sea presence, while also seeking greater clarity and stability on the tax regime to enable the projects to proceed.

“While we believe in the importance of the UK oil and gas sector, we are now considering opportunities in other countries alongside those in the UK as we continue to seek to expand our portfolio and create value for all of our stakeholders.”

At 1320 GMT, shares in Serica Energy were down 6.83% at 295.25p.

Reporting by Josh White for Sharecast.com.