Solan oil field on-stream

Solan coming online as oil price rises is positive news for producer

PREMIER Oil has finally started production from a giant field it developed west of Shetland, where the company has faced delays it blamed on low productivity and bad weather.

The Solan field came on-stream on Tuesday about 18 months later than originally hoped.

The start-up means Londonbased Premier will be able to capitalise on the recent rally in oil prices, which some hope could herald the start of a recovery in the North Sea.

The industry has been hit hard by the plunge in the crude price from $115 (£81) per barrel in June 2014, caused by growth in supplies running well ahead of muted demand.

Brent crude traded at about $44 (£31) yesterday afternoon, compared with $27 (£19) in January. The price has risen 10 per cent plus in the past week amid signs producers may act to try to support prices.

Leading producing nations including Saudi Arabia, Iran and Russia will meet this weekend in Qatar to discuss a possible deal to freeze production.

Any such deal could mark a turning point after a long period during which countries such as Saudi Arabia have kept the taps running despite falling prices to maintain market share.

But Tom Pugh at Capital Economics noted the recent price increase assumed a deal would be agreed in Doha.

“The main point is there has been little change in the fundamentals but prices are up over 10 per cent on last week,” he said.

Brent crude fell about 30 cents (21p) per barrel yesterday, after rising for three days running.

Analysts at Bank of America Merrill Lynch said politics could trump economics at the Qatar meeting.

“Should Saudi announce an additional output expansion in response to Iran’s return to market, Brent prices could retrace to the $30 to $35/bbl (per barrel) range [£21 to £25],” said the bank.

Iran wants to export more oil to capitalise on the lifting of sanctions on the country.

Capital Economics and Bank of America Merrill Lynch expect prices to increase to above $50/ bbl (£35) next year. Cuts in spending on new fields should help bring supply and demand back into balance.

But Mr Pugh said the recent rally could encourage firms to produce from fields they may otherwise shut in, keeping a lid on prices.

Brent is unlikely to return to $100/bbl (£70) unless demand rises significantly.

Premier may expect to make money from Solan at current prices. In February, Premier said it had reduced underlying production costs to $16 (£11) per barrel oil equivalent in 2015 from $18.5/ boe (£13) in 2014. It expects to produce 25,000 barrels daily from Solan in the second half of 2016.

But Premier wrote $998 million (£702m) off the value of its North Sea portfolio in 2015. The charge mainly related to Solan, originally due on-stream in the final quarter of 2014.

It said the commissioning of the production platform took longer than planned amid “significantly worse than anticipated weather conditions”.

In 2015, Premier noted low productivity on Solan in the winter and cut the book value of its UK fields by $730m (£514m).