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Oil Grab in Falkland Islands Seen Tripling U.K. Reserves: Energy

The world’s largest oil companies like Exxon Mobil Corp. and Royal Dutch Shell Plc face a dilemma: whether the potential of a virgin basin outweighs the risk of a worsening international dispute.

January 25, 2012, 7:20 AM EST

By Brian Swint

Jan. 19 (Bloomberg) — Thirty years after Margaret Thatcher fought a 74-day war with Argentina over the Falkland Islands, the prospect of an oil boom is reviving tensions.

Oil explorers are targeting 8.3 billion barrels in the waters around the islands this year, three times the U.K.’s reserves. Borders & Southern Petroleum Plc will drill the Stebbing prospect next month, one of three Falkland wells that Morgan Stanley ranks among the world’s top 15 offshore prospects this year. Meanwhile, Rockhopper Exploration Plc is seeking $2 billion from a larger oil company to develop the Sea Lion field, the islands’ first economically viable oil find.

“The area is underexplored and highly prospective,” said New York-based Morgan Stanley analyst Evan Calio. “These could be like the high-impact wells in Ghana and Brazil a few years ago that opened up a whole host of basins.”

A major drilling success will further raise the political temperature as Argentina maintains its claim over the U.K’s South Atlantic territory, 300 miles (483 kilometers) from the Latin American coast. President Cristina Fernandez de Kirchner said Britain is taking her country’s resources, while Thatcher’s successor David Cameron yesterday accused Argentina of a “colonialist” attitude that didn’t account for islanders’ rights.

Cameron has approved contingency plans to bolster U.K. troops on the islands, and Prince William, a search and rescue pilot and the second in line to the British throne, may spend six weeks there this year, the Times of London reported today.

Not Negotiable

“We want to have a full and productive relationship with Argentina,” said Foreign Office spokeswoman Sophie Benger in an e-mailed response to questions. “Whilst the sovereignty of the Falklands is not up for negotiation, there is still much we can do together.”

The world’s largest oil companies like Exxon Mobil Corp. and Royal Dutch Shell Plc face a dilemma: whether the potential of a virgin basin outweighs the risk of a worsening international dispute. While producers with interests in Argentina, such as BP Plc, may be put off, others will want to participate, said Tim Bushell, chief executive officer of Falkland Oil & Gas Ltd., who’s looking for drilling partners.

“Big oil companies are used to dealing with political risks, and bigger ones than some saber rattling by Argentina,” Bushell said in a telephone interview, declining to name the companies he’s talking to. “For every BP, there are other major companies that don’t have an interest in Argentina.”

Shares Rise

Falkland Oil & Gas rose as much as 5.8 percent in London and traded at 49.25 pence as of 1:07 p.m. Rockhopper climbed 4 percent to 329.25 pence.

The Falkland Island government, which manages the territory’s mineral rights for the 2,955 islanders, says the big producers are interested and talking to the companies already active in the region. Of the five U.K.-based explorers that have drilled or plan wells, the largest, Rockhopper, has a market value of 899 million pounds ($1.4 billion).

“The Falklands is at a stage where a big company can take a large share in what could be a big oil province,” said Stephen Luxton, the Falkland Islands’ director of mineral resources. “There is an active program of marketing by the companies here. There are discussions going on, though we can’t name names.”

Falkland Oil & Gas plans to drill the Loligo prospect later this year, a well targeting 4.7 billion barrels of oil. Named after a Patagonian squid, it’s the second-most prospective well planned worldwide this year after one in Namibia, according to Morgan Stanley. The company’s Darwin prospect will follow and ranks sixth on the U.S. bank’s list.

Darwin, Stebbing

Borders & Southern will start drilling the Darwin prospect by the end of January, which seismic surveys suggest may hold as much as 760 million barrels of oil and 3 trillion cubic feet of gas. Stebbing, the target of the company’s second well, may hold as much as 1.2 billion barrels.

Together, the four wells planned for the Falklands this year are searching for about 8.3 billion barrels of oil. The Jubilee field, which was discovered in 2007, propelled Ghana into one of the world’s top 50 oil states. Brazil’s Lula field, drilled in 2006, holds an estimated 6.5 billion barrels of oil equivalent.

“There could be significant volumes down there and it would open up a new hydrocarbon province,” Borders & Southern CEO Howard Obee said in an interview. If the first two wells are successful, “we’d like to do a big drilling program, not only to appraise what we’d find but also drill up additional prospects. To do that, we’d need quite a bit of money.”

Selling Stakes

While the company will probably be able to sell more shares to determine the size of a discovery in this campaign, it may have to sell stakes in prospects to develop them, said Tracy Mackenzie, an analyst at broker Brewin Dolphin in Edinburgh. Borders & Southern holds a 100 percent interest in its fields.

Rockhopper says its Sea Lion discovery, made in 2010 and which may have more than 400 million barrels of recoverable oil, is commercial and will be developed. Chairman Pierre Jungels said last month that the company is showing drilling data to potential partners. The company this month ended a 10-well campaign that lasted two years. It has $100 million in cash after raising 46.5 million pounds ($72 million) in a share placing in October.

That’s just a fraction of the $2 billion the company reckons it will need to get the oil to market. Developers will have to build a floating production and storage unit to load the crude onto tankers. Cairn Energy Plc, Premier Oil Plc and Noble Corp. may be interested in investing, Bank of America Corp. analyst Alejandro Demichelis wrote in a Jan. 16 note.

Colorful Penguins

Spokesmen for BP, Shell, Premier and Cairn declined to comment on whether they’re interested in investing in the Falklands. Exxon and Noble Energy didn’t respond to e-mailed requests for comment.

All the supplies will probably have to come from Europe, about 8,000 miles away. The Falklands consist of two large islands and more than 700 smaller ones, home to the colorful penguins that give Rockhopper its name.

Argentina maintains that its sovereignty over the islands was interrupted in 1833, when British forces occupied the Malvinas Islands, expelling the Argentine population, an act to which the people and government of Argentina never consented. Thatcher sent a task force to retake the islands after Argentina’s military dictatorship invaded the territory on April 2, 1982.

Risk of Failure

Earlier drilling campaigns show the risk of failure in unproven oil provinces. Shell drilled on the northern side of the islands in the 1990s and found traces of oil before abandoning the prospect in 1998 as crude prices fell to around $10 a barrel. Interest in the region revived as oil prices rose higher than $100 a barrel, though Shell had disposed of its acreage.

Desire Petroleum Plc, which has licenses adjacent to Rockhopper’s, drilled six dry wells in a failed campaign that ended in April. Argos Resources Ltd., which also holds licenses in the region, decided not to use a rig after Rockhopper because it couldn’t raise enough money.

The global financial crisis has made it harder for oil explorers to borrow from banks and kept a lid on the amount companies can raise on the market. The oil and gas index of London’s Alternative Investment Market, where all five Falkland explorers are listed, fell 35 percent last year.

That leaves larger companies as the most likely sponsors in the region, and the government said some of them are already involved in talks.

“The majors are always going to be interested when a new basin comes on the map,” Morgan Stanley’s Calio said.

–Editors: Will Kennedy, Stephen Cunningham.

To contact the reporter on this story: Brian Swint in London at [email protected]

To contact the editor responsible for this story: Will Kennedy at [email protected]

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