Spain's Repsol is in talks to merge its British North Sea oil and gas business with private equity-backed NEO Energy, according to three industry sources, marking the latest consolidation effort by companies operating in the basin amid heightened fiscal pressures.

The merger would create a company with production of more than 110,000 barrels of oil equivalent per day, making it one of the largest producers in the aging basin.

The two parties have held extensive talks in recent weeks about combining their operations and could announce a deal in a matter of weeks, two of the sources said.

The potential value of the deal could not immediately be known.

The sources were not authorized to speak to the media and declined to be identified. Repsol and NEO Energy declined to comment.

North Sea producers have merged and sought to diversify out of the region in recent years after the U.K. imposed a windfall profits tax following a rise in energy prices in 2022.

The sector faces further uncertainty ahead of next week's British election, as the Labour Party, which has a wide lead in the polls, has promised to increase taxes on the sector, which currently have a rate of 75%, one of the highest in the world.

Labour has also promised to remove an exemption for profits reinvested in oil and gas production, although the exact details remain unclear.

Repsol Resources UK has interests in 48 offshore fields, of which it exploits 38, according to its website.

The company also had a tax loss position of $3.7 billion at the end of 2022, according to its latest statement. Tax losses can be used to offset taxes on new investments.

Repsol UK was producing about 39,000 barrels of oil equivalent per day at the end of 2022, according to the statement.

Repsol last year ended a years-long arbitration with China's Sinopec under which the Spanish company acquired the remaining 49% of their joint venture in the North Sea, giving it full control of the assets.

NEO Energy was founded in 2019 with the backing of private equity fund HitecVision and has since completed a series of North Sea deals, including acquisitions of TotalEnergies and Exxon Mobil .

According to its website, it has interests in 25 North Sea fields. It produces about 80,000 barrels of oil equivalent per day, according to one source.

(Reporting by Ron Busso; additional reporting by Pietro Lombardi; editing by Edwina Gibbs; Spanish editing by Benjamín Mejías Valencia)