The Gatwick Gusher oil well, once said to be of national significance, has been downgraded in value for the third time by its owner.

UK Oil & Gas plc (UKOG) announced in annual accounts last month that it was cutting nearly £3m off the book value of the Horse Hill-1 well, near Horley in Surrey.

The company put the value of the well at £800,000.

In the three most recent sets of annual accounts, UKOG has announced that the well, known as HH-1, would be impaired (reducing the value of an asset).

Analysis of the accounts suggests HH-1, once described as a possible world-class potential resource with “North Sea-like oil rates”, has been impaired by more than £13m since 2020, when it began formal production.

DrillOrDrop twice invited UKOG to comment on the apparent changing fortunes of the well. We also asked the company to confirm that the figures were accurate. UKOG did not respond.

Value slide

The accounts for the year to September 2019 gave no indication of the value of HH-1.

But in September 2020, the company said it assessed HH-1’s value at less than £5m and impaired it by more than £9m.

The accounts for the year to September 2020 said:

“The Directors determined that the net present value of the HH-1 well was £4.78 million and therefore determined that HH-1 should be impaired by £9.35 million.”

The company explained:

“The lower net present value assessment was primarily due to a combination of lower than expected flow rates resulting from earlier than expected water ingress and slightly lower than expected Brent crude oil prices.”

In annual accounts to September 2021, the board announced it had again impaired the value of HH-1. The company said:

“The Directors determined that the net present value of the HH-1 well was £3.63 million and therefore determined that HH-1 should be impaired by £1.46 million.”

The company said:

“This lower net present value assessment was primarily due to lower-than-expected flow rates at HH-1 where production rates have now stabilised following commencement of long-term oil production during the previous financial year.”

The most recent annual accounts, published last month, for the year to September 2022, said:

“The Directors determined that the net present value of the HH-1 well was £0.8 million and therefore determined that HH-1 should be impaired by £2.9 million.”

“Following an impairment review carried out as at 30 September 2022, the net present value of the Horse Hill-1 well was determined to be lower than its recorded book value, and it was therefore determined that the value of associated oil and gas properties should be impaired by £2.9m.”

“Possible world class potential resources”

The downgrading of HH-1’s value is in contrast to the early optimism about the well.

Drilling began on HH-1 in September 2014. The well was completed two months later, reaching a depth of 8,770ft.

In December 2014, UKOG estimated oil in place in the Upper Portland sandstone at 8.2m barrels, up from a previous estimate of 3.1m.

In April 2015, UKOG upgraded the resource again. A statement announced an estimate by Nutech, one of the world’s leading petrophysical analysis companies, that HH-1 well had a total oil in place of 158 million barrels of oil per square mile.

Stephen Sanderson, UKOG’s chief executive, said in the statement:

“we believe that, in addition to the Portland Sandstone oil discovery, the Horse Hill well has discovered a possible world class potential resource in what is interpreted to be a new Upper Jurassic ‘hybrid play’”.

Mr Sanderson told the Guardian:

“Based on what we’ve found here, we’re looking at between 50 and 100bn barrels of oil in place in the ground. We believe we can recover between 5% and 15% of the oil in the ground, which by 2030 could mean that we produce 10%-to-30% of the UK’s oil demand from within the Weald area.”

He told BBC News:

“We think we’ve found a very significant discovery here, probably the largest [onshore in the UK] in the last 30 years, and we think it has national significance.”

The media began calling HH-1 the Gatwick Gusher.

“Outstanding results”

On 21 March 2016, UKOG announced “outstanding” results of flow tests on HH-1.

The company said the total aggregate stable dry oil flow from two Kimmeridge limestone zones and the Portland sandstone was 1,688 barrels of oil per day. This was likely to be the highest flow from any onshore UK new field wildcat discovery well, UKOG added.

Mr Sanderson said:

“The flow test results are outstanding, demonstrating North Sea-like oil rates from an onshore well.

“This simple vertical well has achieved an impressive aggregate oil rate equivalent to 8.5% of total UK onshore daily oil production.”

Later in 2016, UKOG acquired all of Angus Energy’s holdings in Horse Hill and announced plans for two new wells and extended well testing at the site.

Two months after getting planning permission, UKOG announced it would apply for consent to drill more wells and extract oil at Horse Hill. That planning application, granted in September 2019, has been the subject of a long-running legal challenge, due to go to the Supreme Court in June 2023.

In 2018, UKOG said test results on the Portland section of HH-1 exceeded expectations. Later that year, the company said the well had produced nearly 14,000 barrels in the tests, most of it from one of the Kimmeridge zones.

A sidetrack well, HH2-2z was drilled in 2019 but encountered formation water. There are now plans to turn this into a water injection well.

Formal production

Formal production from HH-1 began in March 2020. This week, the regulator, the North Sea Transition Authority published data for February 2023, giving us three years of statistics.

According to the data, peak oil volumes and daily rates were in the second month of formal production, in April 2020. After that, the general trend has been downwards.

The well achieved rates of more than 100 barrels of oil per day (bopd) in only 10 months of the past three years. All these were before May 2021. Since then, the average production rate was 58 bopd.

In February 2023, HH-1 produced 0.4% of UK onshore oil production (258m3 out of 64,345m3). UK onshore oil production in February 2023 was less than 2% of the country’s total oil production.

Water production

In May 2020, HH-1 also began producing formation water, along with the oil. The water cut (the ratio of formation water to total volume of liquids) rose in 2020 and into 2021.

Large volumes of formation water can reduce the profitability of a well. Formation water is often very salty and has to be disposed of, either by a licensed operator or reinjected into the formation.

In autumn 2020, the Portland section of HH-1 was reperforated to improve production performance and minimise the proportion of water produced in the well.

But the water cut generally held steady, peaking in September 2022 at 41% (185m3 of formation water in 451m3 of fluid). The latest water cut, for February 2023, was 38% (159m3 of water in 417m3 of fluid).

In April 2021, the company said of Horse Hill:

“The oil field has behaved like a talented but troublesome teenager: plenty of promise but with the expected problems too.

“In addition to the constant and mounting regulatory workload, the oil field’s geology has proved unexpectedly complex.”

“More data needed on decline”

Last month, more than three years after the start of formal production and eight years after drilling, UKOG confirmed it was still unsure about the volume of oil that could be commercially recoverable from HH-1.

The latest accounts said:

“HH-1 production remains in contingent resource category, as the company requires more data to establish the long-term decline trend of the well.”

Contingent resources are quantities of hydrocarbons that are estimated and potentially recoverable but not currently considered to be commercially-recoverable.

UKOG added:

“Once the company gets sufficient data it intends to review the HH-1 production decline and attribute reserves to HH-1, thus transferring them from contingent resources to reserves category.”

Reserves are quantities of hydrocarbons anticipated to be commercially recovered.

UKOG previously said moving HH-1 into the proven developed producing reserves category would allow it to borrow against the site’s oil production to finance future wells.

The other wells planned for Horse Hill have not yet been drilled.

UKOG recently announced plans to farmout work on the next production well at the site (HH-3) to a Texas-based company, Pennpetro Energy. Pennpetro would pay up to £4.6m to drill the well and take 49% of any oil production revenue.