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Financial Times: Falkland Islands upstream sector: Consolidation likely within the next year, sources say

By Oliver Adelman in London
Published: July 31 2007 15:01 | Last updated: July 31 2007 15:01

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Consolidation among the four major players in the upstream oil and gas exploration sector in the South Atlantic off of the Falkland Islands is likely in the short-term, said industry participants.

The four main players in the region presently are Desire Petroleum, Rockhopper Exploration (GBP 40m/EUR 59.5m market cap), Borders and Southern Petroleum and Falklands Oil and Gas Limited [FOGL].

Two industry sources said that all these companies were unlikely to be able to finance exploration work far into the drilling stage without significant external funding. Sales of equity stakes in certain assets was one option; issuing new shares was another, the sources said.

However, given the amount of money needed to finance large-scale exploration leading to production, some form of consolidation among these four juniors was virtually inevitable, said the sources.

“I think it will be interesting to see how the situation develops for the smaller exploration firms operating out of the Falkland Islands. Everyone in the industry wants them to succeed as they see them as the last great pioneers working the unknown,” said one industry source.

FOGL announced to the London Stock Exchange earlier this week that it was in sales talks with a “resources major” regarding the sale of an equity stake of one of its assets in the region.

A source close to the company said that he believed this particular sale did not involve a wider sale of the company, and that he was unaware of any consolidation talks taking place at this time. However, the source did say that the economics of the situation made some kind of long-term consolidation among the four logical.

A source within Rockhopper said the company was unable to proceed to the drilling phase without additional financing, but that it had not held any consolidation talks itself. Spokespersons for Borders and Southern and Desire Petroleum both did not return telephone calls seeking comment.

One of the industry sources said the four would be “in trouble” if there was not some form of consolidation. “They are small companies and all running out of cash, some form of consolidation is inevitable,” the source said, adding this consolidation would likely start within the next six months. The individual also suggested that BHP Billiton, Royal Dutch Shell, Hydro and ConocoPhillips were all potential acquirers in the region.

A spokesperson for BHP Billiton said that the company never commented on market speculation.

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Copyright The Financial Times Limited 2007


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