EDINBURGH OIL and gas explorer Melrose Resources looks set to trump the Russian gas behemoth Gazprom to snatch a £60 million Bulgarian government gas storage contract as analysts dramatically raised expectations for the company.

News of the deal emerged as Melrose chief executive David Thomas predicted that four new developments in the Black Sea could produce total earnings of between £100m and £130m.

Although Gazprom, Russia's largest company, supplies 90% of Bulgaria's gas, it is the existing 10%-supplier Melrose that looks better placed to provide the government with a new subsea storage facility for stockpiling gas.

The Bulgarian government owns an existing facility in the Chiren area, north of the capital, Sofia, but the regime is advancing its attempts to guarantee security of winter gas supply to the population. If the negotiations with Melrose prove successful, the second storage unit will created by converting the company's Galata well in the western Black Sea, which is now 80% empty.

Negotiations are expected to conclude later this year, but analysts say that the deal is "extremely likely" to go ahead following a Melrose joint feasibilty study with state utility Bulgargaz, which showed the mature field to be ideal for storage. It is hoped that it will eventually store 1.7 billion cubic metres of gas, the bulk of which will have been supplied by Gazprom.

Melrose's Thomas said that the likely deal was the result of contract negotiations that took place before he assumed his present role last summer.

"We have the rights to convert the field to storage, which were negotiated when the original production concession was granted". he said.

David Macnair, analyst at Melrose's house broker Brewin Dolphin, valued the contract at £60m and said: "I suspect Melrose has been keeping in with the powers that be in Bulgaria, talking to the right people and developing their relationships. "It is right to call this a coup. If you have got a 10% market share and you manage to nip in front of someone with 90%, that's the word to describe it."

Peter Nicol of international energy adviser Tristone Capital agreed with the £60m valuation for the storage contract and said it could be worth twice as much, depending on long-term demand from the government.

Macnair raised his forecasts for Melrose in the current year by 25% and increased his target price from 425p to 500p, compared to the current share price of 409p. He explained that this was due both to the storage deal and the higher oil price, which is likely to create windfalls for companies like Melrose in the months ahead.

"Melrose is more exposed to the oil price rise than it has been in the past. A year ago, it primarily had fixed-contract gas production, but because of its big new oil field in West Dikirnis in Egypt's Nile delta which came on-stream late last year, it has much more sensitivity to the rising oil price," he said.

In 2007, Melrose had a pre-tax loss of £27.2m on turnover of £80m after spending heavily on high-risk exploration in the Black Sea that produced three dry holes. Having switched the exploration focus to Egypt, Macnair is this year predicting a spectacular rise in profit to £72m on a turnover of £100m.

Thomas said that Melrose was also enthusiastic about the four other Western Black Sea areas in which it has been exploring within the so-called Block Galata (see map).

Melrose believes they could yield as much as 120 billion cubic feet of gas, but estimates that even if there were only 50 billion, it would be worth £100m to £130m at current prices after operating costs and tax over the seven-year life of the concession.

The company is about to set up a subsea cable between the Galata installation and Kaliakra, the first of the new wells, in the coming months.

"The new wells are pretty valuable because the development costs are so low," said Thomas.

David Littlejohn, director of industries and infrastructure at Scottish Enterprise, welcomed the news of the company's success. He said: "Melrose Resources is a Scottish success story which has innovated and expanded into many different areas of oil and gas exploration, development and production. Its ambition and expertise has once again been recognised in the global marketplace."