UK Falklands oil strike, could it mean war?

June 17, 2010

By Peter C Glover
UK Correspondent
Troy Media

Peter Glover

LONDON, UK, June 17, 2010/ Troy Media/-Two-hundred million barrels of oil is a drop in the ocean compared to the voluminous gusher of BP’s oil spill. It is just 120 days in UK consumption terms, a mere 10 days in the US.

But Rockhopper Exploration’s announcement in May that it had struck oil in the North Falklands region at the first attempt threatens a bitter-sweet drama of its own for British Prime Minister David’s Cameron new administration.  

The strike, the first in the Falklands Basin, could, according to the British Geological Survey, be the first fruits for a region that could prove to be Britain’s new “North Sea”. Signs of an investor frenzy setting in have sent share prices rocketing. But the early find has already significantly ratcheted up tensions with Argentina – and talk of a second Falklands War.   

A Falklands bonanza

The early strike in Rockhopper’s Sea Lion prospect saw its share price surge by 500 per cent. It also led to, albeit more modest, jumps in the share price of its other British rivals, Desire, Arcadia and Argos, operating licensed tranches in the north Falklands Basin.

Operating the Ocean Guardian rig, Rockhopper hit a 53m-thick band of layered oil deposits, the thickest layer being 23m, after 20 days of drilling to a depth of 9,000 feet. After the initial announcement the company confirmed the oil was of a “high quality reservoir interval with very good porosity and permeability” with “no oil/water contact encountered”. The company has a flow test for the prospect scheduled and is set to sink four more wells in the area.  

A conservative estimate of reserves across the Falklands Basin suggests a bare minimum viable recovery of 3.5 billion barrels of oil. The estimate of the British Geographical Society suggests around 60 billion barrels, the equivalent of the UK’s North Sea deposits, though such a figure, as some Big Oil executives have told the UK’s Channel 4 News, may well be an overly optimistic figure. Even so, the finds could prove transformational to Britain’s long-term debt problem; as well as making millionaire ‘oil barons’ of the island’s 3,000 residents.  

In February 2010 the UK’s then Labour Government agreed to take up to half of the revenues in the event of finding oil and gas. The Falklands Executive Council, only too aware of Argentina’s brooding language over reclaiming Las Malvinas, as teh Falklands are known in Agentina, indicated as long ago as 1994 its desire to make a more significant contribution to its own defense after the 1982 invasion. For Britain, it appears payback time for a sovereignty paid for in blood may have arrived. The economic yield to Britain from corporation taxes and royalties from the fields to the north of the Falklands alone could well be over $145 billion.

The recent campaign picks up where companies, including Shell, Lasmo (now part of Italy’s Eni-Lasmo) and Amerada Hess (now the Hess Corporation) of the US,  left off after drilling six wells in 1998. Traces of oil were found in five – gas was discovered in the sixth.  Only the global price crash sending prices to $10 a barrel put paid to the commercial viability of exploitation at that time.    

But payback takes on a very different connotation for an Argentinean government and people plainly still passionate about reclaiming the Falklands – and the energy riches around them.  Argentina is about to sink its own wells to the west of the island, outside what Britain claims are its territorial waters. When the Ocean Guardian was towed to the region in February this year, the Argentine government of Cristina Kirchner immediately warned it would take “adequate measures” to stop all British exploitation of the area.

There could be blood

Daniel Day-Lewis’s famously uttered the line “There will be blood!” in the quintessential oil film. Fears over whether Argentina’s strategic “measures” will run to that appear, for the moment, to have been allayed as President Kirchner’s government has already ruled out military action.

When in February it became clear that Britain would soon start drilling, the Argentine government lobbied hard to elicit support from both the United Nations and other South American countries to force Britain back to the negotiating table over sovereignty of the Falklands Islands.

In 2009 the government in Buenos Aires had already submitted to the UN its claim over a vast expanse of the Antarctic Ocean. The claim included the Falklands and its offshore environs. Argentina has also moved to impose shipping restrictions from her countries ports to the islands. She has urged South American neighbours to follow suit. To date Argentina has received the backing of 32 Caribbean and Latin American countries, including Brazil, Mexico and, most vocally, from Venezuela’s Hugo Chavez and Nicaragua’s Daniel Ortega.

Congratulating Cameron on his electoral victory in May, Argentina’s President, Cristina Kirchner, called on him to “halt all oil exploration in the ‘disputed’ waters around the Falkland Islands” in favour of “fruitful cooperation with my country”. But even with Britain’s military commitment in Afghanistan, it is not likely that an Argentina, undergoing a far more severe economic crisis than Britain, would be in any shape to take on a British Royal Navy largely unaffected by the UK’s land war in Asia.

Cutting Argentina in on a three-way deal over oil and gas revenues has been mooted as a possible compromise. However, such is the strength of Argentine public opinion, any administration that accepted anything less than reclaiming full sovereignty over the islands is unlikely to survive long.

Investment frenzy

Four British companies are now scheduled to begin drilling eight new wells off the Falklands before the year is out.  Although it will be some time before any oil actually pumps, in the UK, penny share investors are already champing at the drill bit.  

In the last year no fewer than 48 oil companies listed on the London Stock Exchange have seen their share prices double, with 17 seeing a threefold rise. Seven of these have, according to a report in Money Week, multiplied their shareholders’ investment fivefold. The hunt is already on for investors to call the next strike. Front-runners include Desire Petroleum and Rockhopper again, with Falklands Oil and Gas reporting at the end of May it had begun drilling off the East Falklands. Another strike and the oil investment frenzy will start in earnest.  

And with Argentina’s economy in no shape to consider war, the only forces that could “top kill” Britain’s south Atlantic black gold bonanza appear to be market ones.

Channels: EnergyTribune.com, the Red Deer Advocate, June 18, 2010