Argentina’s latest saber--rattling over oil exploration around the Falkland Islands is puzzling given the recent financial results from the island’s key prospectors. Desire Petroleum and Borders & Southern Petroleum, two of five London-listed exploration businesses with interests in the archipelago, announced annual pre-tax losses of US$42.5 million and US$1.74 million on Monday.
Those figures are typical of explorers struggling to strike oil and there are two others in a similar situation. Argos Resources and Falkland Oil and Gas are long on promise, but short on producing barrels of the black stuff.
The Argentine government’s anger is heightened by the fact that one outfit, Rockhopper Exploration, has discovered significant oil reserves in the Sea Lion prospect to the north of the islands and has been seeking a partner to invest in the US$2 billion project.
The most recent in a flurry of aggressive statements from Argentina, seemingly timed to coincide with the 30th anniversary of its invasion of the Falklands, emerged last weekend.
Argentina’s embassy in London sent a two-page letter to up to 15 banks, thought to include Royal Bank of Scotland and Goldman Sachs, raising the threat of civil and criminal action if they continue working with the five London-listed companies.
Casting a wide net, the diplomats targeted banks that advise the companies as well as City firms that provide stockbroking services or write research notes about the five, a list that includes Panmure Gordon and Oriel Securities.
Wielding a mixture of legal and diplomatic brawn, the letter warned the institutions to “bear in mind ... the sovereignty dispute and ... the consequences of any unlawful hydrocarbon exploration activities in the Argentine continental shelf in proximity to the Malvinas [Falkland] Islands.”
“It should also be borne in mind that ... participation in those activities will cause companies directly or indirectly involved in them to be subject to such administrative, civil and criminal actions as may be provided for in the Argentine laws governing such activities,” the letter added.
The five explorers declined to comment on Monday, with one industry source admitting that none of them wanted to be “dragged into the political realm.”
However, while there is confidence that the legal threats will not damage the five companies, another industry source said an attempt at co-operation between the UK and Argentina would at least remove the distraction of a prolonged territorial tussle and the knock-on effect on exploration.
Such an arrangement has the potential to compensate Argentina if a deal on sovereignty remains out of the question.
According to Edison Investment Research, reportedly a recipient of the embassy letter, the islands could generate US$180 -billion in royalties and tax from oil.
The following companies are operating in the Falklands:
Estimates of the amount of oil around the Falkland Islands range from 8.3 billion barrels to 60 billion barrels, but Aim-listed Rockhopper is the only business to have come close to realizing that promise. It has found recoverable reserves of between 400 million and 500 million barrels of oil at its Sea Lion prospect in the north Falklands basin and said this year that eight companies are interested in a joint venture on the project.
That announcement stoked takeover speculation about the company, which hopes to start producing oil in 2016.
Analysts have said that a “farm-out,” where a partner is delegated extraction duties, is the most likely outcome.
Desire endured a dire end to 2010 when it reported that two promising wells were dry. There was a run on the company’s shares after it was forced to backtrack on the “highly encouraging” results of initial drilling that turned out to be the opposite.
It has farmed out a well to Rockhopper, close to the Sea Lion prospect, which has led to a discovery of oil and gas. Despite that success, it is not drilling at present.
Another company that has struggled to find oil, but remains optimistic after recently completing a 3D survey of its prospect near Sea Lion, a patch of territory that covers more than 1,100km2 in the north Falklands basin.
According to one estimate, there could be up to 2.1 billion barrels of oil in its prospects, but, as yet, they have proved elusive.
Borders & Southern Petroleum
The company has two exploratory wells in the south Falkland basin. The promising prospects are called Darwin and Stebbing.
The firm was founded by Harry Dobson, a mining entrepreneur who once held a 6.7 percent stake in Manchester United Football Club and made ￡30 million (US$47.65 million) from his investment.
Falkland Oil and Gas
Falkland Oil and Gas, has the most production licences in the region. Its sites to the south and east of the Falkland Islands have significant potential, with the Loligo prospect holding an estimated 4.7 billion barrels.
However, the company must wait until Borders & Southern finishes with its exploratory rig before it can start work. Sharing a rig makes sense, according to industry sources, because exploration is such a costly business. This is particularly true when there is a chance that the wells could come up empty — a fate that cost Desire’s shareholders millions of pounds. It can cost US$1 million a day to run an exploratory well in deep water.