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Is Premier Oil’s Big North Sea Risk About To Pay Off?

It’s a tricky game that Premier Oil is playing in the ultra-expensive North Sea, but is it finally paying off?

Premier Oil, the independent UK exploration company, has announced its first test output from the offshore Solan field near Shetland. The news comes after a delay of several months, due to harsh weather conditions. The company has set a daily target of between 20,000 and 25,000 bpd. Regular production is planned to start in mid-2016.

When maximum production rates at Solan are reached, it will yield about a third of Premier Oil’s current daily output, which at the end of 2015 stood at 57,600 barrels per day. For this year, the company projects average daily output of 65,000-70,000 bpd. Related: Are We On The Right Track To An Oil Price Recovery?

Three years ago, or even two, the news about such a major contributor to overall production would have sent Premium Oil’s stock sky-high. But two years ago, oil was trading in three-figure territory. Now, after reaching a trough of $27, it has rebounded, pulling up oil-company shares with it, yet nowhere near past levels: Premier Oil has lost 90 percent of its value over the last five years.

Premier reported a net loss of $1.1 billion for 2015, on revenues of the same size, because of non-cash impairments worth $583.5 million regarding inaccurate oil price predictions, and those “principally relating to the Solan field,” the company said in the press release announcing its 2015 financial results. Related: Will China's Slowing Economy Stall The Silk Road Project?

Like its peers, Premier is now streamlining its operation and cutting costs, which is perhaps why its acquisition of E.ON’s North Sea assets came as a surprise. It’s true that now is the perfect time to buy oil assets, as they are being sold cheaper than they would have been at the height of oil’s latest Golden Age, when a barrel traded at $140. However, it is also true that North Sea oil in the British shelf has the highest production costs in the world. Even with the abolition of the Petroleum Revenue Tax.

Premier Oil also said in its 2015 financial report that it has hedged around a third of its 2016 production at $73.40 a barrel, which is pretty high given the current price environment. The Doha meeting on Sunday is not really expected to lead to anything more substantial than a general agreement to freeze oil output. What’s more, Saudi Arabia has made it clear that it will not undertake a production freeze if Iran doesn’t join it, which it won’t. This deepens the pointlessness of the endeavor. Related: This Is How Oilfield Services Are Surviving Low Oil Prices

On Monday, prices will dive (unless something else happens over the weekend), despite the lack of any great expectations for the meeting. Improvements in the near future are always a possibility, but their degree will most probably be modest and will continue to be modest until the global glut starts showing some actual signs of subsiding.

Premier Oil can sleep safe in the knowledge that it has a significant hitherto untapped source of new oil. That’s good to know for the long-term future. Over the short-term, however, it’s basically the same with or without Solan – there is still too much oil to sell and too few buyers.

By Irina Slav for Oilprice.com

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