Tensions escalate over Falkland Islands oil

Falkland Battle Lines Form Over Jurassic Oil Search  

Tuesday, 16 February 2010 14:14 - "Falkland Battle Lines Form Over Jurassic Oil Search"

Argentina is driving up exploration costs for U.K. oil companies seeking to drill near the disputed Falkland Islands, escalating tensions over the remote South Atlantic archipelago that led the two countries to war in 1982.

Argentina is forbidding vessels that stop at the Falklands to load cargoes at its ports for the 8,000-mile return journey to Europe. That’s likely to increase costs, Mark Jenkins, a director at shipbroker Simpson Spence & Young Ltd. said in an interview. Voyages “will be more expensive,” he said.

Argentina summoned U.K. embassy officials to issue its “most energetic protest against the imminent start of drilling” near the Falklands, known in Argentina as Las Malvinas, on Feb. 2. London-based Desire Petroleum Plc, which plans to start drilling offshore the islands this month, fell 4.68 percent in two days after Argentina said Feb. 11 it had refused to let the Thor Leader cargo ship leave a river port.

“The government wants to signal that anyone who is collaborating with the Malvinas on any projects won’t be welcome to Argentina,” Federico Thomsen, 53, who heads political and economic researcher E.F. Thomsen in Buenos Aires, said in a Feb. 15 telephone interview. “It would be better for Argentina to try to integrate and participate more in global trade.”

First Exploration
Desire will start the first exploratory drilling in Falkland Island waters since 1998, when companies including Royal Dutch Shell Plc abandoned the search because they didn’t discover enough oil. Companies including Melbourne-based BHP Billiton Ltd. and Falkland Oil & Gas Ltd., based in London, also plan to start drilling, using the Ocean Guardian rig.

The Ocean Guardian is scheduled to arrive at the Falklands on Feb. 17 at 2p.m., according to Bloomberg ship-tracking data. The rig is being towed by the 73-meter long Maersk Traveller, a tug ship owned by Copenhagen-based AP Moller Maersk - A/S.

“The oil price in ‘98 was $10 a barrel and is now $70-75 a barrel,” Sam Moody, managing director of London-based Rockhopper Exploration Plc, which is leasing the Ocean Guardian after Desire, said in an interview. “We believe we need about 50 million barrels at an oil price of $50 to break even.”

Desire’s Liz prospect has estimated resources of between 45 million and 783 million barrels, according to a report by Senergy Ltd., which specializes in appraisal for oil explorers, released in September 2009 and commissioned by Desire.

Thor Leader
Argentina blocked the Thor Leader from leaving a Techint Group plant after it traveled to the Falkland Islands without Argentine government permission. The company said the ship contained steel pipe that was destined for ports in the Mediterranean, without giving more precise information on the final destination.

A discovery of commercial quantities of oil may cause the share price of Desire to surge as much as 90 percent, Nick Copeman, 39, an analyst with London-based Oriel Securities, said in a Feb. 9 telephone interview.

Desire shares rose 2.25 to 107.5 pounds at 12:38 p.m. in London trading while Rockhopper rose 2 percent to 64.5 pounds and Falkland Oil & Gas shares rose 2.1 percent 156 pounds.

Argentina has repeatedly protested efforts to explore for energy deposits off the islands. In 2007, then President Nestor Kirchner voided a 1995 oil and gas exploration agreement with the U.K. that had been suspended for five years.

‘Sovereign Rights
“The Foreign Ministry reiterates its sovereign rights over the Malvinas Islands, South Georgia and the South Sandwich Islands and the sea surrounding them, which form a part of its national territory,” Argentina’s Foreign Ministry said Feb. 2. Argentina’s objections won’t affect the islands’ oil licensing or any other policies, said Emma Edwards, a member of the archipelago’s eight-member assembly. “Argentina can continue protesting, but it doesn’t matter,” Edwards, 38, said in a Feb. 4 telephone interview from Port Stanley, the capital. “They’ve been doing this forever.”

There’s no point in Argentina continuing to call on international bodies such as the United Nations and the Organization of American States to press its claims, said Carlos Escude, 61, a foreign policy advisor to Argentina’s Foreign Ministry in 1991 and 1992. Neither has the power to make the U.K. change its stance.

“There is no future in pursuing those options,” Escude said in a Feb. 9 interview from Buenos Aires.

The U.K. government reiterated the Falkland Islands’ right to pursue oil and gas exploration. “We are absolutely clear this is a legitimate business in Falkland Islands waters,” a Foreign and Commonwealth Office spokesman said by e-mail. “Argentine reaction is a matter for the Argentine government. Argentina is an important partner for the U.K.”

Windswept Islands
The development of an oil industry would enable the windswept islands, which now depend on sheep farming and fishing, to diversify its economy, according to Edwards. Some 4,200 people live there, with about 1,700 of them based at the Mount Pleasant military complex.

Oil around the Falklands lies within Jurassic or Triassic layers under the seabed, dating back more than 145 million years. These are deeper than most of the world’s offshore discoveries, according to New York-based Bernstein Research, an investment research company.

Crude oil futures traded at $74.94 a barrel on the New York Mercantile Exchange at 9:31 a.m. London time today. Prices have doubled in the past year.

The price of oil is not the main reason for the lack of success in 1998, Moody said. “The world is a different place and there’s been a huge leap forward in seismic technologies.”

BHP Partnership
A partnership between BHP Billiton and Falkland Oil & Gas is seeking a second rig to drill in another offshore area, Tim Bushell, 50, chief executive of Falklands Oil & Gas, said in a Jan. 29 interview from London. Ruben Yogarajah, a BHP spokesperson in London, declined to comment. BHP and Falkland O&G’s Toroa prospect has estimated prospective resources from 380 million to 2.9 billion barrels, Falkland said Nov. 26.

Drilling and exploration in Argentine-controlled waters near the islands is due to start in the second half of the year, according to a Buenos Aires-based spokesman for the Argentine unit of Repsol-YPF SA, who declined to be named because of company policy.

The search will be conducted by a partnership between YPF, as the Argentine arm of Repsol is called, Petroleo Brasileiro SA and Argentina-based Pan American Energy LLC, which is 60 percent owned by BP PLC, while the remaining shares are owned by Argentina’s Bridas Group.

By Rodrigo Orihuela, Morwenna Coniam and Eliana Raszewski. Source: Bloomberg