Reserves at the Mutineer-Exeter field have been downgraded by 40% to 61 million barrels.

Santos reduced its forecast for 2006 output from the field by 46% to 19 million barrels.

Merrill Lynch & Co downgraded Santos stock from "buy" to "neutral", while Macquarie Equities cut its recommendation on Santos to "under-perform" and reduced its estimate for the Adelaide-based company's earnings by 20% in 2006 and 13% in 2007.

But the reserves falls at Mutineer-Exeter were offset by rising reserves elsewhere. Reserves replacement for 2004 was at 121% in 2004, and replacement rate for proven reserves over the last three years has averaged 130%.

These results do not include potential reserves expected from Santos's recent Jeruk oil discovery in the Sampang PSC in East Java or the Hiu Aman oil and gas discovery in the Donggala PSC in the Kutei Basin.

Santos said the improved reserves resulted from development drilling, the commercialisation of significant volumes of new gas contracts, and several strategic acquisitions.

A major focus of the group's 2004 capital program was the conversion of undeveloped reserves to the developed category, according to Santos.

During the year, 102 mmboe of proven reserves and 134 million boe of proven plus probable reserves were developed, significantly increasing the value of reserves.

Acquiring some of Novus Petroleum's assets and an increase in the group's equity in the Gippsland Basin's Patricia Baleen project also added 22mboe or proven and probable reserves.

In more good news for Santos, production from the Mutineer-Exeter oil fields - the company’s first operated offshore oil project - will begin next month, several months ahead of schedule and 10% below budget.

As reported in EnergyReview.net yesterday, first Mutineer-Exeter oil production – previously planned to start in June 2005 – will now begin in March.

Initial production from the field, located 160km off the coast of north-western Australia, is expected to be 70,000 to 90,000 barrels of oil per day. Arrangements are already being made in Singapore for the sale of this light, sweet crude.

Mutineer-Exeter is expected to have a pay-back period of less than two years. This could be even faster if high oil prices continue.

Santos said the accelerated start-up was achieved by early delivery and installation of the floating production storage and offtake (FPSO) production facility and the sub-sea system, according to Santos.

Four horizontal wells have been successfully drilled and completed with state of the art dual electric submersible pumps that are expected to provide high initial production rates.

“This early FPSO development, at a time of high oil prices, has significantly increased the value of the fields”, Santos managing director John Ellice-Flint said.

“First production will occur only three years from the Norfolk-1 oil discovery and only 17 months from development approval. This achievement is world-class and is ahead of the top quartile project development benchmarks set when development approval was given.”

But the news from the field is not all good. In its reserves announcement, Santos confirmed a downward revision in Mutineer-Exeter oil reserves.

Further drilling during 2004 and early 2005 has indicated that the reservoir distribution was more complex than originally interpreted, resulting in total (gross) proved plus probable reserves now being estimated to be 61 million barrels (previously 101 million bbls).

While results in the initial appraisal stage were generally as, or better than predicted, the top of the main reservoir of the field has proven to be deeper than expected in some parts of the Mutineer field and the oil pay has been thinner in several key wells, Santos said.

While overall production over the life of the fields is expected to be lower than originally predicted, mean 2005 production is now expected to be around 15 million bbls – higher than expected at the time of development approval.

In 2006 mean production of around 19 million bbls is expected.

Interests in Mutineer-Exeter are Santos (operator) 33.4%, KUFPEC 33.4%, Nippon Oil Corp 25% and Woodside Petroleum 8.2%.