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2014-10-08 20:35:00

LARGE OIL OF SENEGAL

LARGE OIL OF SENEGAL

Shares in Cairn Energy rose 3.6 per cent on Tuesday after the Edinburgh-based oil explorer confirmed a large oil discovery off the coast of Senegal in west Africa.

The company stopped short of declaring the deepwater discovery commercial, but said initial estimates pointed to anywhere between 250m and 2.5bn barrels of oil being present, with a mid-range estimate of 950m barrels.

The FAN-1 well sits in 1,400m of water 100km off the Senegal coast in the Sangamor Deep block. A second well is scheduled to be drilled to test the extent of oil present in the licence area.

Cairn is the operator and has a 40 per cent working interest in three blocks off Senegal, where is it partnering with the US's ConocoPhillips, which holds a 35 per cent stake. Sydney-listed African explorer FAR holds a 15 per cent interest in the blocks, and Senegal's national oil company Petrosen holds the remaining 10 per cent.

Shares in Cairn jumped by as much as 13 per cent to 203.3p, before losing ground to trade up 3.6 per cent at 185.9p on Tuesday afternoon.

The discovery is the first clear success for the FTSE 250 constituent in a campaign of drilling in the Atlantic margins of west Africa in waters stretching from Senegal through Mauritania, Morocco and Western Sahara – which is administered by Morocco but whose sovereignty is disputed by the Algeria-backed Polisario Front independence movement.

Two wells funded by Cairn on Morocco's Atlantic coast over the past year have failed to discover oil or gas in commercial quantities.

Simon Thomson, Cairn's chief executive, suggested the success of the FAN-1 well helped vindicate the company's commitment to its costly exploration campaign in the region.

"We have encountered a very substantial oil bearing interval [geological formation] which may have significant potential as a standalone discovery," he said. "Furthermore, this result materially upgrades the prospectivity of the block with a proven petroleum system and a number of deep fan and shelf prospects established."

Analysts welcomed the discovery, which follows a period of disappointment with Cairn and other London-listed explorers who have had little luck in prospecting for significant oil and gas deposits in previously ignored regions.

In a note on Tuesday, Lucas Herrmann, analyst at Deutsche Bank, described the find as "a potentially significant oil discovery for Cairn and European E & P [exploration and production] in what has been a barren period for conventional exploration across the sector".

He calculated, based on a midpoint estimate of the oil in place, that the discovery could be worth $280m to Cairn based in its net interest, or 30p a share.

Brendan Warn, analyst at BMO Capital Markets cautioned that without further validation there was still the risk that the initial discovery could yet emerge as "sub-economic". But he maintained an "outperform" rating on Cairn, saying the result was a "positive indicator for future drilling in the region".

Sentiment towards Cairn remained depressed by a continuing freeze imposed by the Indian government on its ability to dispose of its remaining 10 per cent stake in former sister company Cairn India, previously valued at $1bn.

ft.com

Tags: SENEGAL, CAIRN, OIL, US, CONOCO,