The recent news from oil exploratory companies in the South Atlantic Ocean regarding increases in estimated reserves has brought the recent oil discoveries in the seas around the Falkland Islands into sharp focus. Oil prospecting around the island chain isn’t new – seismic surveys were done as far back as the 1970s, but it wasn’t until 1996 that the Falklands Island government issued the first drilling licences. For much of recent history, the drillers in the South Atlantic had little luck, and the depressed oil price of the late 90s meant any possible finds were not economically recoverable. However, after the new programme of exploratory drilling commenced in 2010, the drillers’ luck seems to have turned.
The 2010 Sea Lion discovery by Rockhopper was the first to hold enough oil to be considered for commercial development. The latest estimates show that there are approximately 400 million barrels of oil in the Sea Lion field, with overall estimates for the North Falkland Basin ranging up to 60 billion barrels based on analysis of geological samples. Put into context, the North Sea fields are estimated to have held 60-70 billion barrels, of which approximately 75% have already been extracted.
There are 4 wells planned for 2012 in the North Falkland Basin, with a total search figure reaching up to 8.3 billion barrels for this year. Morgan Stanley has rated three of these prospects in the list of the world’s top 15 prospects for 2012, with the Loligo prospect rated at no. 2.
At the moment none of the world’s major IOCs are involved in the Falkland Basin explorations, due in part to political pressure from Latin American countries, many of whom are anxious to support the Argentine claim to the island group. Further increases in the size of finds may result in the IOCs having to make a choice between their interests in Argentina and Latin America, and the potentially huge oil bonanza in the Falkland Basin. Tim Bushell, CEO of Falkland Oil & Gas, notes that “Big oil companies are used to dealing with political risks, and bigger ones than some saber rattling by Argentina.” With the islands charging royalties of just 9 percent per barrel produced, there are already incentives in place which are hard to ignore.
There are huge hurdles to overcome before a single barrel can be extracted – not least the distance from friendly nations. With the current tense political situation, all supplies will have to be shipped in from Europe or the US – a massive undertaking. Argentine support would make the prospecting and future extraction of oil far easier, and could potentially provide a boon for Argentine service firms. However, this would result in a de facto acceptance of the status quo – a situation unlikely to be popular with the Argentinian voter. Furthermore, as many firms in the upstream business are all too aware, exploration doesn’t always lead to discovery, and discovery to production.. Whether significant investment in the Falklands is worth making by any of the major oil industry players is dependent on the analysis of the political situation, along with a view on the estimated size of the reserves and the current and anticipated future oil price. One thing is sure - as long term trends predict declining oil production elsewhere in the world, the possibilities of the Falkland Basin will increasingly become apparent.
Posted by David Balchin on the 24th of January 2012
