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OGA steps into dispute over Pegasus project

Regulator issues first-ever recommendations after after fall-out between Spirit and Neptune

The UK offshore regulator has issued its first ever non-binding recommendations to resolve a commercial dispute after friction arose between Neptune Energy and Spirit Energy about the offtake route for gas from the undeveloped Pegasus discovery in the southern North Sea.

The Oil & Gas Authority (OGA) opened an investigation into the disagreement in June.

OGA said earlier this year it was still seeing too many examples of “deadlock between disputing parties", warning it would be more focussed and transparent in the use of its regulatory powers against operators at risk of failing to comply with the legally binding MER UK strategy to maximise North Sea production.

In the landmark recommendations published this week, the OGA criticised "various communication breakdowns" between Pegasus operator Spirit and Neptune.

Spirit has been seeking to tie back Pegasus to the facilities at the Cygnus field where it also holds a majority 61.25% interest but which is operated by Neptune.

A preliminary heads of terms (HoT) agreement was signed in March 2018 that saw Pegasus gaining access to the Cygnus facilities as a subsea tie-back between October 2021 and December 2023.

However, as detailed engineering progressed — and a better understanding was gained of the sub-surface at Cygnus and its performance improved — Neptune decided it would not move forward with the HoT.

Neptune argued the original agreement would constrain current and future production at Cygnus, while Spirit felt Neptune's concerns were not material and the original HoT should be honoured, said the OGA.

The regulator has now recommended the Cygnus owners should prioritise finding technical solutions to remove the “current blockers” to the facilities’ ability to receive third-party output from assets in the area.

Cygnus' partners have also been told to draw up, by the end of this month, a “hub strategy” to detail potential nearby gas opportunities for the next five years.

The OGA also wants Neptune and Spirit to revisit the original HoT and work through changes to enable an agreement to be signed.

It wants Spirit and its Pegasus partner, Halo Energy, to have the certainty to move forward with the project either as a tie-back to Cygnus or by using another development solution.

While uncertainty remains about the ultimate development solution, Spirit and Halo should continue to look for alternative export routes, the OGA said.

It also asked for monthly progress reports on some of its recommendations.

Neptune welcomed the OGA’s involvement, adding it would continue to collaborate with its partners in support of the strategic objectives of MER UK.

Gerry Harrison, Spirit’s head of non-operated UK production, thanked the OGA for reviewing the matter "so swiftly".

"We believe strongly in the future development of Pegasus and have identified several potential alternative export routes.

"We continue to assess these options... to progress to a final investment decision on the Pegasus West field as soon as is reasonably practicable," he said.

Judith Aldersey Williams, partner at law firm CMS, said by publishing a relatively detailed summary of its investigation, the OGA will help industry players understand the issues being focussed on and the behaviours it considers necessary to comply with MER UK.

“The decision itself will give comfort to hub owners in allowing [the Cygnus owners] to prioritise their own production to reflect changed circumstances despite earlier non-binding HoT with [the Pegasus owners].

"But there are also some significant obligations on Cygnus to progress its plans to a demanding timetable in order to give clarity to Pegasus about future ullage,” she said.

“In short, the OGA continues to have to walk the difficult tightrope between maximising economic recovery and not deterring future investment in the basin.”

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