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OGA sets out guidance to resolve North Sea offtake dispute

UK regulator critical of Neptune Energy and Spirit Energy after investigation into disagreement over Pegasus export route

The UK offshore regulator has criticised "various communication breakdowns" between Neptune Energy and Spirit Energy as it published recommendations for the pair to resolve a dispute about the offtake route for output from the undeveloped Pegasus gas field in the southern North Sea.

The Oil & Gas Authority (OGA) opened a non-binding investigation into the disagreement on 25 June.

Pegasus operator Spirit has been seeking to tie back the field to the Cygnus facilities, where it is also a partner, holding a majority 61.25% interest, but is operated by Neptune.

A preliminary agreement was signed in March 2018 that anticipated Pegasus gaining access to the Cygnus facilities as a subsea tie-back between October 2021 and December 2023.

However, as detailed engineering work progressed and more understanding was gained of the subsurface at Cygnus, with performance better than expected, Neptune did not want to move forward with the heads of terms that had been agreed.

Based on its new knowledge, Neptune argued the original agreement would constrain current and future production at Cygnus, which would be inconsistent with the UK’s legally binding strategy on field owners to maximise recovery, known as MER UK.

Spirit, meanwhile, as both a Cygnus partner and Pegasus owner, felt Neptune's concerns were not material and that the Cygnus joint venture should honour the original agreement, the OGA said.

In its recommendations, the OGA said the Cygnus owners should prioritise work on finding technical solutions to remove what it called the “current blockers” to the facilities’ ability to receive third-party output from fields in the area.

The Cygnus partners have also been told to draw up by the end of this month a so-called “hub strategy” to identify what nearby opportunities there are for bringing gas back to the facilities from its own fields and from those owned by other companies over the next five years.

The regulator also wants Neptune and Spirit to revisit the original heads of terms and work through changes to enable an agreement to be signed.

The OGA wants a fully termed agreement to be signed as soon as practicable to give the Spirit and its Pegasus partner, Halo Energy, the certainty to move forward either as a tie-back to Cygnus or by using another development solution.

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

The OGA has asked for monthly progress reports on some of its recommendations.

It also asked for improvements in communication after "various breakdowns" between the parties, including between the companies within the Cygnus joint venture.

"Misalignments within joint ventures (JVs) have the potential to impact adversely on MER UK and the OGA considered that the Cygnus partners should ensure they are operating in accordance with the provisions of their joint operating agreement and carry out significant work on improving collaborative behaviours within the JV," the OGA said.

Neptune Energy said: “We welcome the OGA’s involvement in the process and their findings and look forward to aligning with all stakeholders around the positive recommendations made.

“We will continue to collaborate with our partners and others in support of the strategic objectives of MER UK.”

Gerry Harrison, Spirit Energy’s executive vice president of non-operated UK production, said: “We note the OGA’s announcement of findings under its non-binding dispute resolution process and thank them for reviewing the matter so swiftly.

"We believe strongly in the future development of Pegasus and have identified several potential alternative export routes. We are continuing to asses these options in order to progress to a final investment decision on the Pegasus West field as soon as is reasonably practicable.”

Spirit Energy said publicly in March 2018 it was eyeing a potential final investment decision in 2019 on the development of Pegasus as a tie-back to Cygnus.

Pegasus is located in Block 43/13b, in a Carboniferous play some 150 kilometres east of Teesside and about 57.4 kilometres from Cygnus.

Spirit said previously about 200 billion cubic feet of gas is contained in the field, where two wells have been drilled so far.

The Pegasus West well flowed at a rate of 91 million cubic feet per day in testing carried out by the jack-up Paragon B391 in 2014. That probe is located seven kilometres from the earlier Pegasus North find.

The Greater Pegasus area comprises blocks 43/12, 43/13b, 43/17b, 43/18b, 43/19b.

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