Financial Times: Battle lines drawn over the Falklands – again

By Dino Mahtani and Ed Crooks
Published: October 18 2007 03:00 | Last updated: October 18 2007 03:00

Jorge Luís Borges likened the war over the Falkland Islands, fought between Britain and Argentina in the 1980s, to “a fight between two bald men over a comb”.

But the $10m (£4.9bn) purchase this month by BHP Billiton, one of the biggest natural resources companies, of a large stake in some Falklands oil exploration licences raises a slight chance the Argentine writer could be wrong.

Argentina, still claiming sovereignty, immediately disputed the deal’s legitimacy – the latest sign of a government asserting rights over remote territories with any scent of oil.

Britain has also raised tensions by considering a claim to extend rights over seas round the Falklands and South Georgia.

In spite of such manoeuvring, it remains unclear whether the Falklands contain any oil worth developing.

The sale of assets to BHP by Falklands Oil and Gas, which has interests in waters south of the islands, comes 10 years after big oil companies abandoned the area.

Back then, a group led by companies such as Royal Dutch Shell and Amerada Hess, pooled resources and shared a drilling rig for use to the north of the islands. It took millions of dollars and 74 days to travel the 7,585 nautical miles from Aberdeen.

The group drilled six wells in 1998 but results were disappointing. Five of the wells did show the presence of oil, but only one brought oil spurting to the surface.

The oil majors concluded that the discovery was not commercial, certainly not at a time when oil prices had slumped because of oversupply and an Asian economic slump, a different situation to today where record oil prices are changing oil exploration economics.

BHP has become the first large company in a decade to venture back.

Matthew Shaw of Wood Makenzie, the energy consultancy, says two things have changed since the 1990s.

“First, the technology has advanced: we now have the ability to drill more effectively in much deeper waters. Second, the oil price has sky-rocketed.”

Looking for oil round the Falklands remains a lottery, however.

Before it left, Shell estimated that the source rock in the northern basin could have generated 60bn barrels of oil, equivalent to three-quarters of Russia’s proved reserves.

Falkland Oil’s licences are in the southern basin, a different geological structure that has never been drilled. Consultants working for the small UK company suggest there could be 10bn barrels of oil in its top 10 prospects to the south and east of the islands.

But there is no guarantee any of the oil is trapped in reservoirs that can be exploited.

“There is some oil down there, but we don’t know how much,” Philip Richards of the British Geological Survey, says. “It could be tens of billions of barrels or it could be virtually zero.”

It is an expensive gamble for BHP. Falkland Oil’s prospects are mostly in water that is 600-1,400 metres deep, and drilling at those depths will typically cost $50m for a single well.

BHP and Falklands Oil have not yet booked a rig, although they hope to start drilling next year or early 2009.

In the northern basin, the acreage left behind by Shell and others was taken on by small companies, which have continued seismic studies.

Many insist they know where they would like to drill next. But they do not have deep enough pockets to hire a rig on their own. Instead, many are hoping to piggy-back on BHP’s rig, although it is unclear whether the mining group will allow this.

“If BHP brought a rig down, we would be in a position to drill another two wells,” Colin Phipps, chairman of Desire Petroleum, a company operating in the northern basin, says.

Eventually, companies operating in the northern basin expect they will be able to farm out interests to other big companies.

However, Howard Obee, chief executive of Borders and Southern Petroleum, another small company with acreage in the southern basin, is not interested in potential partners yet.

“We want to see our own results through before we start dealing with third parties.

“Unless someone makes a really stupid offer.”

Copyright The Financial Times Limited 2007

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