Like some dimly remembered Gilbert and Sullivan operetta, pitting Hardy British tars against perfidious foreigners, the Falklands periodically recycles into the gaze of bemused international observers every decade or so.
Since the brief 1982 war between Argentina and Britain, the issue of sovereignty of the Falklands has lurked beneath the internationals diplomatic surface, an irritant but hardly threatening to reignite a new round of hostilities. Three decades on from that unfortunate confrontation the issue of the Falklands is again roiling Argentinean-British relations over the possibility that the archipelago contains beneath its surrounding waters something of value - oil.
British oil group Rockhopper Exploration has unveiled optimistic plans for a $2 billion oil infrastructure investment in the Falkland Islands announcing on 14 September that it expected to start pumping oil in 2016 from its four licensed Sea Lion concessions totaling 1,500 square miles, with a projected production rate of roughly 120,000 barrels of oil per day by 2018. Rockhopper Exploration said the fifth well in the Sea Lion complex "had found a high quality reservoir package and oil column."
This roseate picture is somewhat clouded by several facts, including that currently Rockhopper Exploration has on hand a mere $170 million, enough to pay for two more scheduled wells. Nevertheless, Rockhopper Exploration shares, which have outperformed the European index of oil and gas companies by 14 percent since August, were up 1.1 percent in early trading after the company's announcement.
A second element in this picture is a sobering fact that while both British and Argentinean companies have drilled a handful of exploratory wells in the water surrounding the Falklands, only Rockhopper Exploration has discovered petroleum.
And thirdly last but certainly not least is the issue of the islands sovereignty, contested by both Argentina and Britain for the last 198 years.
While various City pundits excitedly speculate that the Falklands is to become another North Sea, the above facts taken together indicates at the very least a far greater degree of risk in underwriting Rockhopper Exploration’s ambitious program.
So if the Falklands oil potential is so promising, then why are the international major oil companies not involved? The answer is in brief that they have looked at the islands’ potential and given a pass.
According to a US embassy cable dating from February 2010 and leaked last year by Wikileaks, “ExxonMobil International chairman Brad Corson told us he does not believe there is enough oil on the Falkland Islands continental shelf to be profitable, citing Shell's earlier oil exploration attempts which they abandoned.”
Argentina is not taking the news lightly, declaring its intention following Rockhopper Exploration’s to both file an official complaint against Britain for oil exploration activities in Falklands/Malvinas disputed waters before the United Nations Decolonization Committee along with inviting the U.N. Special Committee of the 24 on Decolonization Chairman Francisco Carrion-Mena of Ecuador to visit Argentina to hold a meeting on the issue in Buenos Aires.
The Falklands now have the dubious distinction of joining the list of contested offshore maritime oil and natural gas concessions spewed by two or more countries.
These include a growing dispute in the eastern Mediterranean between Cyprus, Lebanon, Israel and Turkey, the final disposition of the Caspian's offshore waters currently contested by Azerbaijan, Kazakhstan, Iran, Turkmenistan Russia and rising confrontation in the East China Sea over the region's offshore waters which involves the Spratly island’s more than 750 islands, islets, atolls and cays, whose various portions of offshore waters are claimed by China, the Philippines, Taiwan, Vietnam, Malaysia and Brunei.
What makes the Falklands Argentinean-British dispute unique however is the fact that in 1980 to the countries actually fought a brief vicious war over the archipelago and its surrounding waters. At the time oil exploration of the Falklands waters had yet to begin, and the node and Argentinian writer Jorge Borges famously compared the dispute to “two bald men fighting over a comb.” The stakes are much higher now.
Common sense would seem to indicate that the best way for might be a possible joint venture between the two nations to explore their offshore waters oil potential hand, if any significant reserves are found jointly to develop them with an agreed-upon program of profit sharing, but given the increasingly strident claims sole sovereignty over the archipelago this seems increasingly unlikely.
If therefore Rockhopper Exploration’s drilling programs prove successful, a number of developments seem increasingly clear. First is that, depending on the political temperature in Buenos Aires, future activities may well need the protection of the Royal Navy.
Secondly is Latin America's increasingly lining up behind Argentina's claims to the islands, and Brazil recently stated that it would not allow British exploration vessels to use Brazilian ports to exploit any possible oil developments in the Falklands, Rockhopper Exploration will need to source virtually all of the necessary equipment from the other side of the Atlantic as well as possibly Britain, both major expenses for a company which states it has only $170 million of available cash. Furthermore should development go forward, then a total lack of access to Latin American hydrocarbon infrastructure support means that Rockhopper Exploration will probably be forced to use a floating production, storage and offloading (FPSO) vessel to store and transport its output.
Last but not least, the de facto boycott by Latin America of any future Falklands oil production means that the oil at the very least will have to transit South Atlantic before reaching potential markets, further increasing both development costs and shrinking potential profits.
In light of the above, a joint venture would seem to be the most common sense way to proceed, but given the rising jingoistic nationalism flaring over the issue in both London and Buenos Aires, don't count on any time soon.
While in history is rife with examples of daring oil explorers making fortunes, the number of examples shrink dramatically when major oil companies give a pass on projected production and you future output is situated in a contested site which less than 30 years ago was a “hot” war zone.
By. John C.K. Daly of OilPrice.com
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