UPDATE: Faroe begins drilling at Fulla exploration prospect

UPDATE....with broker comment

Faroe Petroleum (LON:FPM) said drilling has begun on its Fulla exploration prospect west of Shetland in the Atlantic Margin.

The exploration well (in which Faroe has a 50 percent stake) is located to the north-east of the producing Clair oil field and is targeting potentially oil-bearing Devonian Clair reservoir sands at a depth of 2,100 metres.

Faroe is operator of the well and operations are expected to be completed within the summer weather period. 

The licence covering Fulla (Licence P.1161) also contains the Freya oil discovery – which was drilled by Mobil in 1980 and encountered 140 metres of oil-bearing Devonian Clair reservoir sands. Since Freya was drilled, horizontal well drilling on the Clair oil field has led to a very successful extended well test in 1997 that in turn led to development sanction.

The nearby BP-operated Clair field is under phased development and has been on production since 2005, having producted in excess of 75 million barrels of oil to date.

The Fulla prospect is located in the same reservoir sands and is situated along the same structural trend to the north east of both Clair and Freya, which Faroe believes de-risks the prospectivity of the target.

The objectives of the Fulla exploration well are to prove a significant column of oil-bearing Devonian Clair reservoir sands on the Fulla Structure and then obtain an oil sample using advanced wire-line technology.

In December 2010, Faroe farmed out 50 percent of its interest in Licence P.1161 to Canadian Overseas Petroleum (COPL) so that COPL  is paying 60 percent of the estimated well costs for the Fulla well.

"Should the Fulla drilling operations be successful, this will present an excellent opportunity when combined with the already defined Freya discovery to prove up sufficient resources for a significant standalone field development,” said Faroe’s chief executive Graham Stewart, who added that the next exploration wells scheduled for drilling are located on Faroe’s Norwegian acreage and are expected to spud in Q3 and Q4 2011.

Broker Westhouse is pleased with the update, especially as it follows the company’s recent high-profile disappointment with the Lagavulin well.

Westhouse notes that the Lagavulin well was testing a different and far more risky part of the West of Shetlands basin, and came in over budget and was subject to significant operational delays.

The Fulla well, by contrast, is in shallower water and is being drilled in the West of Shetlands summer weather window. “We therefore do not anticipate the operational delays experienced with the Lagavulin well,” says the broker.

It urges investors to view the new well as “significantly lower risk” than the recent Lagavulin well, and to remember that Faroe Petroleum has already had success in the West of Shetlands with the Tornado and Glenlivet discoveries in 2009.

“The company is one of the most active explorers in the UKCS and its exposure to the West of Shetland, along with the Norwegian Continental Shelf , is able to provide investors with a series of high-impact exploration wells which some of its more steady-state peers cannot.” 

The broker retains its ‘buy’ recommendation on the company due to its high exploration upside and strong financial position.
Evolution Securities also welcomed the news, saying success with the Fulla well would help “substantially” de-risk the commercialisation questions surrounding the Freya discovery as the two could be co-developed on a standalone basis rather than require tie-in to BP’s Clair field.

Evolution has an ‘add’ stance on Faroe shares, with a price target of 210p.