Investors wiped around £30 million off the market capitalisation of Faroe Petroleum after the company said an important oil discovery west of Shetland was not commercial.

The Aberdeen-based company has decided to relinquish the acreage containing the Fulla find after concluding it looked too small to justify the costs of bringing it into production.

The result is a big setback for the AIM-listed company, which found Fulla last August with the first well it had operated for itself.

It provides a reminder of the challenges involved working in the deep sea west of Shetland, a relatively under-explored area which is attracting lots of attention from oil and gas firms.

Shares in Faroe Petroleum surged 15% on the day the company announced what chief executive Graham Stewart described as the important Fulla discovery in August last year.

The company hoped there would be enough oil in Fulla and the undeveloped Freya discovery nearby to justify making the hefty investment required to install production facilities.

However, after completing further work to establish the resource potential and assess a means of developing the discovery, Faroe has cooled on the project.

The company told investors: "The results of this work confirm relatively poor oil quality, smaller than expected resource size and limited access to infrastructure. No economically viable solution has been found to bring these discoveries to development at this time, and consequently the licence will be relinquished."

The comments highlight the difficulty involved operating in an area where there is limited production infrastructure.

This means it may not be economic to develop small fields that can not be tied in to existing production facilities nearby.

However, Faroe remains enthusiastic about the West of Shetland area, where the company has stakes in finds made by other operators and has acquired extensive exploration acreage.

It has a 6.25% stake in the North Uist well which BP is drilling in deep water in West of Shetland.

Mr Stewart said yesterday: "Faroe Petroleum adheres to a strict policy of protecting shareholder interests such that substantial development investments are only made where there is good potential for an attractive return, and unfortunately the P1161 licence does not satisfy our economic criteria. The high-potential West of Shetlands area continues to be a core element of Faroe Petroleum's strategy."

Analysts at Jefferies told clients of the securities firm: "At present we do not see any negative read across to FPM's other West of Shetlands assets from today's decision, though we suspect the market may be cautious on FPM's future WoS discoveries given Freya/Fulla's underwhelming reservoir quality."

Shares in Faroe Petroleum closed down 8% at 150p.