Faroe shares jump after oil struck west of Shetland

The discovery boosts hopes that the Atlantic Margin area west of Shetland could provide the next generation of North Sea oil, and came as another British firm, Tullow Oil, posted soaring first-half profits on the back of high crude prices and ramped up production in Africa.

Aberdeen-based Faroe said it had discovered oil in its first operated exploration well, in the Fulla prospect. It is particularly attractive to Faroe as the find is close enough to its existing Freya prospect to allow a joint development, saving it money on capital costs such as pipelines.

Faroe said its exploration well, drilled using a semi-submersible rig, found a net oil column of 45ft, and reservoir quality was better than expected.

Chief executive Graham Stewart said further work would be conducted in the coming weeks to gain a better understanding of the prospect’s structure and its contents.

“With better than expected reservoir quality and good indications of mobile oil, we believe there is potential for a commercial field development, most likely in combination with our nearby Freya discovery,” he said.

Faroe won a licence to explore the area containing Freya and Fulla in 2005. The Fulla exploration, in which it owns a 50 per cent stake, is the first one it has operated itself. Canadian Overseas Petroleum bought the remaining stake by paying a 60 per cent share of the costs of the well.

Yesterday shares in Faroe, which had taken a battering in the recent market turmoil, rallied 15 per cent to close at 159p.

Analyst Matthew Lambourne at Numis said that due to its proximity to Freya and the BP-operated Clair field, Fulla always had a high chance of success, and therefore the strike would have only a moderate effect on the company’s value.

He added: “The key take-away from this result is that Faroe has had success with its first ever operated exploration well, which we think is positive for sentiment going into the company’s fully funded, 13-well drilling programme scheduled [up to] 2013.”

Keith Morris, oil industry analyst at Evolution Securities, said that the joint Fulla/Freya development could be worth about 50p a share, and if the market did not acknowledge that, “Faroe as an astute trader of assets could look to dispose of these undeveloped finds to realise the value the market is currently ignoring”.

News of the Fulla find comes as a new study on the future of oil and gas in the UK Continental Shelf highlights the potential of the west of Shetland region to reverse the decline in production.

The paper by professor Alex Kemp and Linda Stephen of the University of Aberdeen, published today, shows that even with an oil price of $70 a barrel, production should rebound after 2017 thanks to new exploration. At an average of $90 a barrel in real terms, production would be much higher, although the academics warn that the industry is also very sensitive to the investment environment.

Kemp said: “Oil production could stop falling and increase quite significantly for a few years, with the west of Shetland region playing the most noteworthy role.”

Meanwhile Tullow Oil beat market expectation with a 312 per cent jump in pre-tax profits in the six months to 30 June, to $540 million (£324m)

The company doubled its dividend and said it expected to conclude a long-awaited deal in Uganda in September, opening the way for a $10 billion development.