Oil and Gas in the Capitals

	Vol. 231 No. 9
DAYSE ABRANTES, CONTRIBUTING EDITOR, LATIN AMERICA

Falkland Islands exploration pours gasoline on UK-Argentina fire

Four British oil companies continue to drill offshore the Falkland Islands and are now scheduled to drill eight new wells before the year is out, despite an escalating war of words between Argentina and the UK over the self-governing British territory. The companies currently involved are all small explorers, either privately owned or listed on London’s junior AIM market. Their exploration projects are taking place in two separate basins: Rockhopper Exploration and Desire Petroleum have been drilling their interests in the North Basin, and Borders & Southern and Falkland Oil & Gas have prospective interests in the South Basin.

Tensions rose again after Rockhopper Exploration, a British drilling company, announced a discovery in May. Rockhopper hit a 175-ft-thick band of layered oil deposits, the thickest layer being 75 ft, after 20 days of drilling to a depth of 9,000 ft. That well, Sea Lion, has so far been the sole success of the widely anticipated and closely followed Falklands drilling campaign. Analysis performed on the well in June showed that it had discovered medium-gravity oil in a “high quality reservoir interval with very good porosity and permeability,” according to a press release. Also, the initial recoverable resource estimate of 170 million bbl was boosted to 242 million bbl. Based on the optimistic results, the company is set to sink four more wells in the area.

However, the enthusiasm about the Falklands that Rockhopper kindled with Sea Lion was doused last month at the company’s Ernest 26/6-1 well, 75 miles away, which failed to find oil and was plugged and abandoned. Falkland Oil & Gas and Desire Petroleum have also seen recent setbacks: Falkland abandoned its Toroa well in July, while Desire said it found “poor” reservoir quality at its Liz prospect earlier in the year.

The Ocean Guardian rig, which drilled Ernest, will now proceed to the Sea Lion location, where Rockhopper will carry out a flow test on the discovery well 14/10-2 after submitting the final design of the test program to the Falkland Islands government representative.

Recently, another company, Argos Resources, joined the exploration effort by acquiring a number of prospective interests in the North Basin, where a 3D seismic acquisition planned for 2011, worth £22 million, will help to identify drill targets.

A conservative estimate of reserves across the Falklands North and South Basins suggests a minimum recovery of 3.5 billion bbl of oil. Up to now discoveries have not justified the kind of investment that would make the Falklands another North Sea, but early this year, the British Geographical Society sparked new enthusiasm for the Falklands with an estimate placing the territory’s reserves around 60 billion bbl, comparable to the UK’s offshore deposits.

Some oil executives and many analysts consider this to be an overblown figure. Even so, with an additional assessment of 9 Tcf of gas deposits, the resources could cause a major positive impact on Britain’s long-term debt problem and simultaneously bring a windfall to the 3,000 or so residents of the islands.

Since the 10-week Falklands War in 1982, when Argentina’s military dictatorship invaded the Falklands and was resoundingly defeated by the British, Argentina has continued to claim sovereignty over the islands, which it officially refers to as “Las Malvinas.”

Although the UN considers the islands under dispute, the Ocean Guardian drilling rig continues to work 100 miles north of the islands under exploration licenses PL032 and PL033 issued by the Falkland Islands government. The Islanders are entitled to issue licenses under the terms of the Joint Declaration over Oil issued by the Argentine and British governments in 1995, Sukey Cameron, the Falklands government representative in London, wrote in a letter printed by the UK newspaper The Times in February.

The letter states: “The declaration stated the full claim by each side to the territory involved and was to allow Falklands’ oil exploration to go ahead in Falklands waters as defined by the fishing zones—effectively with the agreement of the Argentine Government and without interference or government involvement by it. The first round of exploration duly went ahead in 1998 on these terms. The agreement also designated an area straddling the border of the Falklands’ designated area as a special co-operation area to be exploited jointly.”

In March 2007, the Argentine government unilaterally repudiated the 1995 agreement. The country’s Ministry of Foreign Relations has called the oil and gas exploration activities in the area illegal and is appealing to international organizations to bring the UK government to the negotiating table. Meanwhile, UK Prime Minister David Cameron has very strongly restated Britain’s claim of sovereignty over the Falklands and refuses to negotiate. It is no secret that UK oil reserves are declining and that the country has become a net importer. Thus, there is an economic imperative behind the prime minister’s words and actions.

Argentina appears to be at least holding its own in the diplomatic war against the UK over the Falklands. While the UK has the Commonwealth nations, Europe and the US on its side, heavy hitters to be sure, Argentina has received the backing of 32 Caribbean and Latin American countries that carry the advantage of being right in the Falklands’ back yard. From the point of view of influence with the US and Europe, perhaps the most important of these is Brazil, which has historically supported Argentina’s claim for sovereignty over the archipelago. During the war, Brazil lent military equipment to Argentina, and since then Brazilian governments have signed countless declarations in favor of Argentina’s sovereignty over the islands, the most recent on Aug. 3, during the Mercosur economic summit in San Juan, Argentina.

Despite this support, with British oil companies drilling ahead offshore Falklands and growing enthusiasm for exploration bolstered by the new resource estimates, investors are anxious to see the oil eventually start to flow. Thus, Argentina is likely losing the more important “war”—the economic one.  WO