Premier Oil, the UK independent explorer, is negotiating with the UK government about securing export finance to fund just over half of the $1.5bn investment needed to develop a large oilfield in waters north of the Falkland Islands.
Sea Lion was discovered in 2010 by Rockhopper, a small Aim-quoted UK company, and it is estimated to hold 517 million barrels of oil, which are likely to be extracted in several phases.
Premier bought a 60 per cent stake in the licence in 2012 and it had originally been hoped the field would produce its first oil by this year but the company racked up huge debts progressing the $1.6bn Catcher field in the North Sea as oil prices crashed after mid-2014.
Development of resources around the Falkland Islands has also been complicated by tensions with Argentina over UK sovereignty of the islands.
Premier, which has net debt of $2.7bn, last month completed a lengthy refinancing that gives it more breathing space under its lending covenants but also places constraints on its ability to press ahead with big new investments.
Its lenders now have a final say over significant new projects, which has forced the group to think creatively about how it can secure alternative sources of finance.
Tony Durrant, chief executive of Premier Oil, is hopeful of being able to make a final investment decision on whether to press ahead with Sea Lion in the second half of next year following progress with multiple parties in trying to secure a majority of the $1.5bn needed to pursue the first phase of the project.
He told the Financial Times he is hopeful of securing about $800m in export credit finance — a cheap form of government funding to help UK companies exploit opportunities abroad.
He expects about $600m of the $800m to come from the UK and the remainder from export finance agencies overseas.
“We’ve got some equipment manufactured in Norway, Denmark, Germany etc. Their export credit agencies are also involved but they would come into a syndicate led by the UK,” said Mr Durrant.
Premier has supplied UK Export Finance (UKEF), the UK government agency, with a “detailed financing memorandum”, Mr Durrant said. While UKEF is yet to make a final decision, he said “we’ve had pretty good support all the way through from all parties involved in this”.
“A lot of people would like to see the project go ahead,” he added. UKEF said the agency does not comment on projects for which it has not yet provided support or projects of which it is unaware.
A lot of people would like to see the project go ahead Tony Durrant, CEO of Premier Oil has also been talking to service companies and suppliers, from rig providers to helicopter companies, asking them to consider taking a portion of their fees in deferred payments once Sea Lion has produced its first oil, which is now expected to be from 2021 if the project is progressed.
“That, in effect, acts as another funding up to about $400m,” said Mr Durrant.
However, Premier has faced questions from analysts about whether it should prioritise Zama, a vast discovery recently made off the coast of Mexico. Zama, discovered last month, is estimated by Premier to hold as many as 1.8bn barrels of oil — of which as many as 800m are thought to be recoverable.
Premier has a 25 per cent holding in the licence, with Mexico’s Sierra Oil & Gas owning 40 per cent and Talos Energy of the US holding 35 per cent.
Stephane Foucaud, analyst at GMP FirstEnergy, said: “Technically, I much prefer Zama to Sea Lion. Zama is light oil, shallow water and most importantly the asset is located very close to service industry hubs (in Mexico and in the Gulf of Mexico in the US).”
By contrast, Sea Lion is “located in a very remote area with difficult access to the services industry”, he said. Mr Foucaud also cited political tensions between the UK and Argentina over the Falkland islands although he added: “With the new president in Argentina, things might be a bit easier.”
However, Mr Durrant insisted Sea Lion was potentially a “company maker”.
“We’re not just going to throw that out with the bath water of one discovery in Mexico,” he said, adding that Sea Lion was far more advanced than Zama.
Sign up to the Oil and Gas Vision Tracker service by clicking here.