(Bloomberg) -- The biggest oil discovery off the Falkland Islands wouldn’t give investors sufficient profit at current crude prices, according to project operator Premier Oil Plc.
Premier is looking for $55 a barrel, compared with a price below $50 today, to get the desired 20 percent rate of return at its Sea Lion find, Chief Executive Officer Tony Durrant said Thursday. “If it was a little bit above that, we’d be a bit more comfortable,” he said.
Exploration around the South Atlantic islands has gathered momentum in recent years, with the Sea Lion discovery -- whose first phase holds about 220 million barrels -- generating particular enthusiasm. While project approvals globally are starting to pick up, Premier Oil and partner Rockhopper Exploration Plc have held off sanctioning Sea Lion’s development amid crude’s collapse.
“We are making a decision in 2018,” Durrant said in a phone interview. “What really matters is the oil price in 2021, 2022 when the field comes on stream.”
The Brent futures curve, which reflects what people are willing to pay today to secure supply in the coming years, indicates a level between $53.90 and $57 a barrel in 2021 and 2022. The global benchmark crude is currently trading below $48 in London.
“It’s more of a question of our overall comfort level with the oil-price environment, rather than what it specifically says on the screen in 2018,” Durrant said. The CEO subsequently said on a conference call that the plan to make a final investment decision next year could change.
Refinancing Nears
Premier has a 60 percent stake in Sea Lion’s phase 1 and the rest is held by Rockhopper, which made the discovery in 2010. Premier still derives about half its output from the costly North Sea, and needs to restructure debt following oil’s slump. Its proposed refinancing -- which it sees effective by the end of the month -- will provide a foundation for long-term plans including Falklands production.
Sea Lion’s development is also dependent on obtaining a $1.2 billion external financing package, which Premier would top up with as much as $400 million from its own balance sheet, Durrant said. Securing export credit funding from governments such as the U.K., Norway and Denmark as well as funds from prospective oil-service providers is “quite a complex process,” but talks are progressing, he said.
Flip Side
Low oil prices have eroded profits and squeezed budgets for explorers everywhere, yet they’ve also helped companies negotiate lower fees from suppliers and bring down the cost of production.
The downturn is “driving project economies and lowering per-barrel costs,” Sam Moody, CEO of London-based Rockhopper, said by email. The company aims to “capture the best of the oil-price cycle,” with higher prices in future making Sea Lion “highly profitable for all joint-venture partners,” he said.
Premier may bring in a third partner once funding is in place, according to Durrant. Interested parties don’t include oil majors, since most are involved in projects in nearby Argentina, which has long claimed sovereignty over the Falklands, a British territory.
Premier said earlier Thursday its production climbed 35 percent in the first half, exceeding a company forecast. The shares jumped 35 percent on Wednesday after Premier announced a billion-barrel oil discovery off Mexico.
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