Michael T. Slocum
Upstream Technology Editor
Large international oil companies such as Royal Dutch Shell PLC and BP PLC have invested in the UK North Sea's West of Shetland area offshore Scotland, but whether their investment is sound remains unclear.
West of Shetland is an inhospitable stretch of deepwater that could hold the key to a second regional hydrocarbon boom, according to John Howell, petroleum geology chair, University of Aberdeen, in an interview with Scotland's The Herald. Some 20% of the UK's remaining oil reserves are there but difficulties abound.
After more than 30 years of exploration, only three area oil fields currently are producing: Foinaven, Schiehallion, and Clair. A fourth, Solan, discovered by Hess Corp. in 1991 and now owned and operated by Premier Oil PLC, will be brought on stream soon.
A tortuous path
Investors, however, are skeptical of Solan proving economic despite a potential of more than 40 million bbl produced over the field's lifetime. The efficient development of the field, critical to overcoming these doubts, depends on mitigating the harsh weather and metaocean conditions to reduce costs. Additionally, Solan lies in about 135 m of water, deeper than more mature plays in the North Sea.
Premier has endured a tortuous path to production since being granted permission in 2012 to develop Solan field's Block 205/26a, 160 km offshore Scotland (OGJ Online Apr. 25, 2012).
The area's potential has been enough incentive to slog through last year's Scottish independence vote, weather that delayed commissioning in February, and financial hurdles that led to Premier acquiring the outstanding 40% of the project from Chrysaor Ltd. in June.
Block 205/26a development consists of two production wells equipped with electrical submersible pumps and two water-injection wells. All wells are completed subsea and tied back to a production platform operated remotely from Aberdeen. Fluid separation, gas treatment, utilities, and power generation are topside.
Subsea infrastructure on the site includes a 10,000-tonne oil storage tank capable of holding 300,000 bbl to be exported through a single-anchor loading system to shuttle tankers.
Operators looking to invest West of Shetland watched to see how Premier and its service companies, including Bibby Offshore, coped with the technical problems caused by short weather windows to mitigate related delays and reduce costs.
In November, Premier Chief Executive Officer Tony Durant noted that commissioning had progressed well and Solan would begin production by yearend. After its initial string of setbacks, then, Premier seems on the cusp of realizing Solan's potential, expecting an initial flowrate of 28,000 b/d with peak production reaching 35,000 b/d during its expected 20-year life.
Doubts remain
Some in the financial community remain unimpressed. Sanjeev Bahl, an analyst at Numis Securities, describes Solan field as a thorn in Premier's side. Bahl believes the project's net cost of $1.85 billion will be hard to recoup given current oil prices and that the company has used post-hedge cash flows to prop up development of the project.
While Numis retains a buy recommendation for Premier overall, Bahl warned in an interview with the UK's Proactive Investor that for Solan to be economic, oil prices will need to be higher than $70/bbl.
That may seem like a tall order in the short term, but offshore development is not a short-term game. More important to the long-term profitability of projects in the West of Shetland area are UK tax-regime changes that make operators like Premier or Shell more hesitant to invest in high-risk deepwater endeavors on the UK Continental Shelf.
Shell Chief Financial Officer Simon Henry told The Herald such "arbitrary and unexpected" changes are inimical to a long-term stable energy policy that encourages investment in difficult environments like West of Shetland.
In the end, it will be the unpredictability of the way the UK taxes oil companies, not the weather, that determines the long-term success of projects like Solan. Sound investments will follow a sound energy policy.
