LONDON Jan 26, 2007 (Dow Jones Newswires)
Expensive rig rates and low natural gas prices are seen prompting oil and gas producer Tullow Oil (TWL.LN) to delay planned drilling in two of its key U.K. offshore fields, which will ultimately force production to drop in 2007.
Tullow's Chief Financial Officer Tom Hickey told Dow Jones Newswires Friday that Tullow intends to reduce its drilling program in the Schooner and Ketch fields, explaining that it's "not a case of canceling activity but deferring it."
Hickey refused to say how much the company expects production levels to fall as a result, but said, "Obviously, had we kept the rig, production would have been higher."
There is no point in aggressively bringing gas to the U.K. market because a mild winter caused demand for gas to fall in the last quarter of 2006, Hickey said. That - in combination with soft gas prices, new pipelines, full storage levels and high rig prices - meant that "we are going to allocate capital to Africa and Asia, where we will get better returns," he said.
The company is expected to reveal how much that might defer or curtail production when it releases a trading update Wednesday, Oriel Securities analyst Phil Corbett said.The two fields account for just over half of Tullow's U.K. production and 20% of its total production. Last year, the U.K. represented 40% of Tullow's entire portfolio, explained Corbett.
He said, "There is a downside risk to 2008 production forecasts, and we expect further light to be shed on the issue in the next trading statement."
For now, however, Oriel maintains a hold rating on Tullow shares, Corbett said.
Corbett said Tullow has given six months' notice before returning the Ensco 101 jack-up rig, operating on both Ketch and Schooner, in June, though the company had initially contracted to use it until the end of 2007.
Tullow's current daily rig rates - $273,000 a day - means the company is paying among the most expensive rates in the U.K., Corbett said.
"It appears Tullow's management believe North Sea rig rates are reaching a top and a rig can be contracted back at lower rate sometime in the near future," Corbett added.
The company, which has operations in Northwest Europe, Africa and South Asia, acquired the Schooner and Ketch assets in 2005, with production tripling since then.
Tullow previously delayed production at other U.K. fields. Corbett said, "The Horne and Wren fields were shut in last summer and started up again at the end of last year in attempt to take advantage of the summer-winter differential."Gas prices have a tendency to rise during winter, pushed up by increased demand due to cold weather.
The company reiterated to Oriel Thursday that it still can achieve 140 million standard cubic feet a day of gas from Schooner and Ketch combined in 2007, although this may not be sustained for as long as previously anticipated, Corbett said.
In early November, Tullow reported that the NW Schooner appraisal well tested at a rate of 7.5 mmscf/d. It also then reported that Ketch-7 was producing at a rate of 50 mmscf/d.
Tullow's gas production is just under half of its total global production.
Hickey said Tullow still plans to hit its 80,000 barrels of oil equivalent a day production target in 2007. At 1437 GMT, Tullow's shares were trading down 2.3 pence, or 0.6%, at 401.8 pence.
Copyright (c) 2007 Dow Jones & Company, Inc.
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