Industry

Sussex oil exploration licences at risk in legal battle, investor warns

BroadfordBridge

Broadford Bridge in March 2015

An investor in oil exploration in Sussex says its legal battle with partner Celtique Energie could cost the companies three drilling licences covering 124,000 acres.

The US-based oil company, Magellan Petroleum, said the dispute over money to drill a well may not be resolved before the licences expire in under five months.

The litigation concerns a £1.5m payment from Magellan to Celtique to drill a well at Broadford Bridge, near Billingshurst in West Sussex.

Under an agreement with the Department of Energy and Climate Change, the well must be drilled by 30th June 2016 to keep PEDL licences, 231, 234 and 243. So far, some preparation work has been carried out at the Broadford Bridge site but there’s been no activity since Spring 2015.

Magellan, which has a 50% stake in the well and the PEDLs, revealed more details of the dispute this week in its quarterly report to the US Securities and Exchange Commission. The report said:

“Considering the pending litigation and that these licenses are subject to drill-or-drop obligations with license terms ending June 30, 2016, there is a risk that the litigation with Celtique will not be resolved in time to avoid the relinquishment of these licenses.”

The legal dispute dates back to March 2015 when Celtique went to the High Court over the drilling payment, known as a cash call. Magellan Petroleum UK Ltd (MPUK) counter-claimed in April that year. Celtique’s request for a summary judgement in June 2015 was dismissed and the court ordered it to pay legal costs of £60,000 to Magellan (see litigation timeline at the end of this post).

“Vigorously contest”

In this week’s report, Magellan said:

“MPUK believes that it has strong defenses and intends to vigorously contest the Celtique Claim. However, due to the early stage of this matter and the uncertainty and risks inherent in litigation, the Company cannot predict an ultimate outcome.”

Magellan said it could not predict the outcome but said “potential resolutions” could include a possible sale of its interests.

It added that it could not make a “meaningful estimate” of possibly losses. The result “may have a material effect on the ultimate amount and/or timing of the company’s capital expenditures” in the licence areas.

DrillOrDrop will ask Celtique Energie for a response to Magellan’s report and we’ll update this post with the response.

Horse Hill

Magellan has a 35% stake in the Horse Hill well. The report hinted that the company may sell this when the results of the ongoing flow test are known. More details here

Offshore Isle of Wight

Magellan may also withdraw from its interests in the offshore licence P1916. The report said:

“With respect to P1916, there was very limited activity during the three months ended December 31, 2015, and no further material activity is planned during fiscal year 2016. Considering the risk profile of this prospect and the challenges in securing a potential drilling site, the Company may decide to withdraw from this license.”

Losses and warnings

According to the report, the parent company’s finances are deteriorating. It warned that there may not be enough money to continue as a going concern.

Losses on operations for the six months to the end of December 2015 stood at $4.3m. Working capital for the same period fell by more than $4m and the company’s cash balance was down to $429,000.

The report said:

“The Company continues to experience liquidity constraints and continues to sell certain of its non-core assets to fund its operations. However, proceeds from these asset sales may not provide sufficient liquidity to fund operations for the next twelve months. These factors raise substantial doubt about the Company’s ability to continue as a going concern.”

Risks

The report concluded “An investment in our securities continues to involve a high degree of risk”.

It identified the following:

  • “The uncertain nature of the anticipated value and underlying prospects of our UK acreage position”
  • “Government regulation and oversight of drilling and completion activity in the UK, including possible restrictions on hydraulic fracturing that could affect our ability to realize value from unconventional resource projects in the UK”
  • “The uncertainty of drilling and completion conditions and results”
  • “The availability of drilling, completion, and operating equipment and services risks”
  • “Uncertainties associated with litigation matters, including the current legal proceeding initiated by Celtique”

Link to report to US Securities and Exchange Commission

Litigation timeline

3rd March 2015

Celtique Energie claims Magellan pays £1.5m representing outstanding cash calls for the proposed well at Broadford Bridge near Billingshurst in West Sussex – and forfeit its 50% co-ownership rights of PEDLs 231 and 234. Celtique also claims interest at 5% until the money is paid.

24th March 2015

Celtique files for summary judgement

1st April 2015

Magellan Petroleum UK filesd a defence and counter claim, asserting that the cash calls by Celtique are not valid “due to the failure” of Celtique to comply with contractual accounting procedures, adhere to agreed drilling schedule and execute development plans. Magellan seeks to recover damages from Celtique for “purported forfeiture of the PEDL interests”.

15th June 2015

Celtique’s application for summary judgement is heard and dismissed. Celtique is ordered to pay MPUK’s costs of responding t the application, assessed at £60,000.

29th June 2015

Costs paid by Celtique to Magellan

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