UK Oil & Gas has announced plans to farmout work at its oil production site at Horse Hill in Surrey.

In a statement this morning, UKOG announced that the Texas-focused Pennpetro Energy would pay for the acquisition of 12km of 3D seismic surveys.

Pennpetro would then pay the full cost of drilling the next production well at Horse Hill, to be called HH-3. The total cost to Pennpetro would be capped at £4.6m, the statement said.

The deal would give Pennpetro 49% of any oil production revenue from HH-3.

On completion of the 3D survey, Pennpetro would get a 7% stake in the Horse Hill licence, PEDL137, and the neighbouring PEDL246.

After drilling HH-3, Pennpetro would get an additional 42% stake, taking the total interest in the licences to 49%.

The news coincides with an announcement from Pennpetro that David Lenigas, a former director of UK Oil & Gas plc, had become the company’s executive chairman.

UKOG’s statement said the deal depends on Pennpetro providing the necessary funds to drill HH-3 and complete the farmout programme within six months of finishing the 3D seismic survey.

The farmout also needs approval from the North Sea Transition Authority, the UK industry regulator.

Under the deal, UKOG would remain the Horse Hill operator and operator of licences PEDL137 and 246. Its interest in the licences would fall to 43.6% on competition of the farmout, down from the current 85.635%.

UKOG would retain 100% ownership of all production and revenues from the current production well, Horse Hill-1 (HH-1).

UKOG shares opened up on news of the farmout. They rose from 0.058p when markets closed on Monday to 0.064p at 8am today. They have since fallen to 0.062p.

UKOG’s chief executive, Stephen Sanderson, said:

“This mutually advantageous transaction will inject new activity into Horse Hill, aiming squarely to deliver increased production and revenues from the oil field.

“The farmout enables UKOG to move this asset forwards without the need to raise capital, enabling our resources to be firmly focussed upon the appraisal and development of the Loxley gas discovery, our most material petroleum asset.”

Horse Hill has planning permission for another four production wells at Horse Hill, including the proposed HH-3.

But the permission is being contested in a legal challenge at the Supreme Court on 21-22 June 2023.

Horse Hill was nicknamed the Gatwick Gusher in 2016 following tests which reported flow rates exceeding 900 barrels per day.

In 2022, the site reported average production of 51 barrels a day. The total volume for the year was 2,948m3. This was down from 4,861m3 in 2021 and 6,474m3 in 2020.

The previously drilled HH-2 is being converted into a water reinjection well. This would improve net earnings by about £250,000 a year, UKOG said, by eliminating the need to transport and dispose of saline formation water from HH-1. It would also help maintain reservoir pressure, helping oil recovery from HH-1 and a future HH-3, UKOG said.

UKOG faces another legal challenge in Surrey. Local campaigners have won the right for a statutory review of the planning permission to drill gas exploration wells at the Loxley site near Dunsfold in PEDL234.

Updated to include appointment of David Lenigas as chief executive of Pennpetro Energy