North Sea heavyweight ramping up production West of Shetland
NORTH Sea heavyweight Premier Oil is set to ramp up production from a flagship development off Shetland on which it has faced big challenges, in a development which could encourage interest in the area.
However, the company expects to cut the valuation of the losses and allowances it can set against North Sea profits by up to $500 million to reflect the impact of the fall in commodity prices triggered by the coronavirus.
This suggests it no longer expects to generate sufficient profits to use them up in full.
Premier started production from the Solan field West of Shetland amid fanfare in 2016 only to find that output lagged well below expectations.
The shortfall prompted London-based Premier to slash the valuation of Solan as it tried to find a remedy.
The problems dampened hope that there could be a bonanza in the West of Shetland area, which is relatively under-explored.
However, Premier said yesterday that it expected to increase production from Solan by around 10,000 barrels oil daily by the end of September after drilling an additional well on the field.
The increase, from 1,700 bod in the first half, will still leave total production well short of the original target of up to 25,000 bod.
Nonetheless, it will boost hopes that Premier will achieve acceptable returns on its investment in Solan over the long term.
Premier’s chief executive Tony Durrant has noted the possibility that other finds in the area could be linked to the facilities developed for Solan.
This could make it possible to develop them relatively cheaply and quickly.
The increase in production from Solan could provide a big boost to profitability at Premier amid challenging conditions in the sector.
Premier amassed hefty debts after expanding in the North Sea during the downturn that followed the sharp fall in oil prices from 2014 to 2016.
The company has moved to cut costs and investment in new assets in response to the fall in commodity prices this year.
Premier noted yesterday that it had decided with partners to stop production from three relatively small North Sea fields which are not profitable in the current environment.
The company said it could cut the valuation of its North Sea tax losses and allowances by up to $500m in its first half results citing the lowering of its assumption on future long term commodity prices.
Retrenchment by firms that operate North Sea fields is taking a heavy toll on the supply chain in the area.
Last week industry leaders told MPS that around 7,500 jobs have already been lost in the North Sea following the oil price fall this year.
However, Mr Durrant said yesterday that the decisive action Premier had taken had left it well-positioned to benefit from a recovering oil price.
The Brent crude price fell from around $70 per barrel in January to an 18-year low of $15.98 per barrel in April.
It has risen to around $43/bbl since members of the Opec Plus grouping of exporters agreed to record production cuts, which took effect in May. Demand has started to increase following the easing of lockdown measures around the world.
Premier said it expected production costs to average $18 per barrel of oil equivalent this year.
The company expects to generate cash from its operations net of expenses this year, which it could use to reduce its debts. Net debt fell to $1.97bn at June 30 from $1.99bn at December 31.
Premier recently pulled out of a deal to buy an additional stake in the Tolmount gas field in the North Sea from Dana Petroleum for up to around $250m, which was agreed in January. But the company is pressing on with a deal to buy stakes in two big North Sea developments from BP after securing significant changes to the terms.
Premier also has operations in the Americas and Asia. Shares in the firm closed down1.45p, at 43.86p.