North Sea oil fields in danger as prices dive

BRITAIN's largest exploration and production company yesterday issued a stark warning that development of the giant Clair Field and some of the 140 small North Sea oil accumulations could be postponed because of rock-bottom oil prices.

Enterprise Oil said that 1998 had started "quite pretty badly" with oil prices at their lowest level in real terms for 25 years. This would not affect producing fields but it would hit new developments, it said.

Pierre Jungels, chief executive of Enterprise, blamed crude prices for a 28 per cent slump in his own company's 1997 profits. "Clair is at risk and so is the [Norwegian North Sea] waterflood project at Valhall," he said. Mark Hope, technician director at Enterprise and chairman of the oil industries trade association Brindex added: "Some of the 140 [small] fields could be delayed by lower oil prices."

Industry analysts agreed with this pessimistic scenario. Alan Marshall, energy specialist with Robert Fleming, said he was sure they were right. "It looks like phase one of Clair could be delayed until a clearer picture emerges on the future of oil prices. Valhall needs a lot of investment and smaller accumulations are always vulnerable to low prices."

With the benchmark Brent Blend Crude hitting $13.45 (pounds 8.15) per barrel for March delivery, Enterprise also said it was important there was no change in the North Sea fiscal regime which is under review by government.

With the Chancellor, Gordon Brown, completing work on his 17 March Budget, Mr Hope said "The logic is so powerful." He said he would be surprised if the Treasury did not keep the current system roughly the same.

Despite the uncertainty over prices and taxes, Enterprise said it was committed to a record pounds 500m of expenditure this year. But it admitted it wanted to tighten up on spending. The oil company's cost of sales rose from pounds 6.10 barrels of oil, equivalent in 1996 to pounds 6.48 last year which was above its target of pounds 6.20. This coupled with production delays and lower oil prices led to the drop in pre tax profits from pounds 355.4m to pounds 254.8m.

The company also revealed a fall in net income to pounds 127m from pounds 142m last year. "The results were pretty much as expected. The numbers were weak compared with last year because of higher costs, lower output and declining oil prices." said Jonathan Wright, analyst at Merrill Lynch. "Year-on- year it's about a 25 per cent decline in net income if you strip out the unusual items." Another analyst at a leading brokerage said a total dividend of 17.4p per share was slightly disappointing against estimates of 18p at the top of the range.

"The results fall slightly below our forecasts but not considerably," said the analyst. "What we really need to see is good comments in the analysts meeting. We don't expect to downgrade our estimates."

Enterprise said it replaced 181 per cent of its production in 1997, increasing reserves by 13 per cent year on year.

"The reserve replacement ratio looks good at 181 per cent," said Mr Wright, "But it's all old reserves that have been booked, there's no new discoveries."