By Scott Wright

HURRICANE Energy has suffered a fresh blow to its prospects in the West of Shetland area after a technical review revealed a flagship field contains significantly less recoverable oil than previously thought.

Investors sent shares in Hurricane tumbling more than 50 per cent following the latest update on the Lancaster field, where the exploration company has faced problems with the early production system (EPS).

Hurricane rose to prominence on the back of a series of finds in under-explored areas West of Shetland, targeting an area of rock called the fractured basement that lies below the sandstone targeted by most North Sea wells.

But it has since run into difficulties, with disappointment on a drilling campaign on Lancaster late last year followed by challenges posed by the plunge in crude prices arising from the coronavirus crisis.

Hurricane warned last month of a material downgrade to resource estimates for the Lancaster EPS. That was based on findings from a technical review launched in June.

Now, following further technical investigations, including a “comprehensive reassessment” of Lancaster, the company has slashed its unaudited estimate of recovery from the two existing Lancaster EPS to 16 million barrels of oil (MMbbls) from 37.3 MMbbls. Given that oil has already been extracted from the field, the new estimate suggests an estimated 9.4 MMbbls remain.

The new resource estimate for Lancaster is based on the depth at which oil comes into contact with water, now understood to be at a shallower level than initially thought. Hurricane said the shallower oil water contact is “consistent with the observed earlier and higher water production, and more rapid reservoir pressure decline, than was originally anticipated”. However, it held out hope Lancaster could contain significant volumes of resource in oil-bearing sandstones “onlapping” the basement flanks.

Hurricane has also downgraded its estimate of recoverable resources from the adjacent Lincoln field, part of the Greater Warwick Area joint venture with Spirit Energy. Those have been reduced to 45 MMbbls gross from the 565 MMbbls signalled by a Competent Person’s Report in 2017.

The setbacks may be seen as a dash to hopes of recovery in the North Sea, where the collapse in crude prices sparked by the pandemic has led firms to slash investment.

Hurricane said that it had booked an impairment of $238.9 million relating to Lancaster, which sent it to a loss of $307.7m after tax for the six months ended June 30. It had lost $21.4m in the first half of last year.

The reversal sparked a fresh sell-off in Hurricane shares, which closed down 53.65%, or 3.38p, at 2.92p. Shares were trading at 45.3p on September 11 last year, but have steadily declined in the 12 months since.

Revenue in the first half of this year climbed to $81.9m, up from $22.5m at the same stage in 2019, which reflected “seven liftings of Lancaster crude”.

In spite of oil price volatility, Hurricane generated $21.9m of operating cash flow, against $6.1m last year, because of low production costs. The company expects production from the Lancaster EPS to average between 12,000 and 14,000 barrels of oil per day between September and December this year.

Mulling the outlook, Hurricane said that lower oil prices and reduced production expectations will hit anticipated cash flows, despite an expected reduction and deferral of well spending.

Chairman Steven McTiernan said: “2020 is proving to be a hugely challenging year for Hurricane. We have had to contend with not only a significant fall in oil prices and the effects of the Covid-19 pandemic, but also poorer than expected reservoir performance from the Lancaster EPS.”

Antony Maris, who was named as successor to founder Robert Trice as chief executive last month, said the firm “must now focus on extracting value from Lancaster and our other discoveries”.