UK oil and gas play Hurricane Energy (HUR:AIM) slips 1.4% to 17.75p as it says it will delay any farm-out of its Lancaster discovery, West of Shetland, until after this summer’s drilling activity.

With most oil and gas projects, a company will usually have a decision to make over which point in the exploration and production (E&P) process (see graphic) they choose to exit.

Flow chart


Often small cap E&P companies will focus on early-stage exploration and appraisal where the risks are greater but more value can potentially be created in a shorter space of time.

This leaves the heavy lifting of actually getting the oil out of the ground to larger companies with different profiles and deeper pockets. By putting any farm-out on hold until after the upcoming work programme the company is hoping to divest at least part of its position at a better price.

It is able to go it alone thanks to the £52.1 million placing announced in April. The planned drilling will aim to narrow estimates of the field’s contingent resource – of between 62 million and 456 million barrels of oil equivalent - and confirm production rates from any future commercial development.

If the results of this activity are in line with management expectations the company should be able to farm out on more favourable terms than if the destiny of the field was more uncertain.

Lancaster is located in a fractured basement reservoir. This source of hydrocarbons is largely untapped in the UK where the focus has been on sandstones. Yemen, Libya and Vietnam have successfully exploited fractured basement reservoir potential.

Issue Date: 08 Jun 2016