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.
Why are you making commenting on The Herald only available to subscribers?
It should have been a safe space for informed debate, somewhere for readers to discuss issues around the biggest stories of the day, but all too often the below the line comments on most websites have become bogged down by off-topic discussions and abuse.
heraldscotland.com is tackling this problem by allowing only subscribers to comment.
We are doing this to improve the experience for our loyal readers and we believe it will reduce the ability of trolls and troublemakers, who occasionally find their way onto our site, to abuse our journalists and readers. We also hope it will help the comments section fulfil its promise as a part of Scotland's conversation with itself.
We are lucky at The Herald. We are read by an informed, educated readership who can add their knowledge and insights to our stories.
That is invaluable.
We are making the subscriber-only change to support our valued readers, who tell us they don't want the site cluttered up with irrelevant comments, untruths and abuse.
In the past, the journalist’s job was to collect and distribute information to the audience. Technology means that readers can shape a discussion. We look forward to hearing from you on heraldscotland.com
Comments & Moderation
Readers’ comments: You are personally liable for the content of any comments you upload to this website, so please act responsibly. We do not pre-moderate or monitor readers’ comments appearing on our websites, but we do post-moderate in response to complaints we receive or otherwise when a potential problem comes to our attention. You can make a complaint by using the ‘report this post’ link . We may then apply our discretion under the user terms to amend or delete comments.
Post moderation is undertaken full-time 9am-6pm on weekdays, and on a part-time basis outwith those hours.
Read the rules hereComments are closed on this article