Melrose extends Bulgarian gas production as Russia row bites

Published on Thursday 8 January 2009 20:26

MELROSE Resources has extended production at its Bulgarian gas field after supplies to the country were cut off as a result of the dispute between Russia and the Ukraine.

The Bulgarian government asked the Edinburgh-based oil and gas company to continue production to the end of this month as it struggles to cope with the disruption to its supplies caused by the row.

Melrose, Bulgaria's only substantial domestic producer of gas, had planned to cease production from the Galata field last month to convert it into a gas storage facility. Extracting too much from the reservoir could damage its storage capabilities but the company agreed to a request from the Bulgarian government to extend production until the end of January to help the country through the crisis.

The ageing Galata field now only represents around 5 per cent of the country's supply. But because gas from Russia – piped through Ukraine – has been cut off, Galata it is the only substantial source of gas in Bulgaria.

While the additional production will provide a short-term boost to profits, Melrose chief executive Dave Thomas said production was unlikely to run long beyond the end of January, with the real benefits likely to be felt in the medium term.

Thomas told The Scotsman: "This situation means the gas storage project is becoming even more important to the Bulgarian government. I'm sure they wish they had a facility in place."

The plan is for production from Galata to be halted, and for gas from other fields in Bulgaria to be pumped into the field in summer, to be released for use in winter when demand is higher.

Melrose announced it was in negotiations over gas storage last year when the Galata field was already past its prime as a production field.

Until the plan was announced, it was expected to be worthless beyond 2009, but now analysts believe the project could be worth tens of millions of pounds to Melrose.

Thomas said the Bulgarian government had been co-operative as it sees it as a means of reducing its reliance on Russia.

Aside from Melrose, virtually all of Bulgaria's gas comes from Gazprom, a company controlled by the Russian government.

Thomas predicted concluding negotiations over the facility would run smoothly.

"The government has been very co-operative and I think they'll continue to be."

The current gas dispute could also benefit the company in terms of prices paid for gas in the future. Melrose has two other gas discoveries in Bulgaria, one of which, Kavarna, is expected to come on stream before the end of this year.

"It will be interesting to sit down for the conversations over price," Thomas said.

Melrose also signed an agreement with Sterling Resources to acquire minority stakes in two blocks in the Romanian section of the Black Sea in December.

Romania, like Bulgaria, is heavily reliant on Russia for its gas.