The announcement by Rockhopper Exploration of the first Falklands hydrocarbon discovery has re-ignited interest in the South Atlantic - a little-explored frontier region that could hold more barrels of oil than the North Sea.
True, this isn't a 'new' discovery - it's a reinterpretation of a well drilled by Shell over ten years ago, and Rockhopper still faces significant challenges in commercialising this discovery. But that shouldn't distract from the fact that the four Aim-traded Falklands explorers - the others are Falkland Oil & Gas, Desire Petroleum and Borders & Southern - have made significant progress developing their projects over the past few months. First drilling now looks possible within a year, although a consortium of oil majors, including BP, might get the drillbit into action even sooner in adjacent international waters.
The Falklands area splits into two separate provinces, the North basin and South basin, each of which has very different characteristics. In the North basin, where Desire and Rockhopper are active (together with private company Arcadia), the water is relatively shallow at 100-600m, the targets are large (150-500m barrels of oil) and drilling conditions relatively benign - similar to those in the North Sea.
In the South basin, where Falkland Oil & Gas (FOGL) and Borders & Southern are active, the water is deeper at 500-1,200m, although still not ultra-deep by industry standards. The targets in the south are an order of magnitude larger than their northern counterparts (1,000-3,000m barrels of oil), but drilling conditions are more challenging - similar to those in the 'Atlantic margin' west of Shetlands.
Oil majors Shell, Amerada Hess and Lasmo drilled six wells in the North basin in 1998, of which five had oil shows and one also had gas shows. Although none of the wells confirmed a commercial discovery, they demonstrated that an active hydrocarbon system exists in the area. Furthermore, the majors confirmed the existence of the four fundamental requirements of any oil or gas discovery - source rock, trap, seal and reservoir - although these were not found together. The British Geological Survey adds further evidence to the highly oil-prone nature of the Falklands source rock, estimating that the North basin alone contains some 60bn barrels of oil. Although much of this will have seeped away over time, this still leaves sizeable reservoirs to be tapped.
The majors relinquished their licences in 1999 as the prevailing $10 (£6) per barrel oil price left exploration of the Falklands uncommercial, due to the difficulty of developing any finds in such a remote location. Now, the licences are in the hands of smaller players.
No wells have yet been drilled in the South basin, although drilling to the west in the Malvinas basin and scientific drilling to the east have provided useful data on the potential of the region. Indeed, several oil and gas discoveries have been made in the Malvinas basin, although none has yet been developed. Further west, the Magellanes basin is one of the most prolific in South America, containing numerous fields in production, both onshore and offshore in Argentina and Chile.
Rockhopper's announcement was based on evaluation of three-dimensional seismic data, which allowed consultants RPS Energy to reclassify the newly-named Johnson structure as a gas discovery with mean contingent resources of 3.4 trillion cubic feet (tcf) of gas and a high estimate of 7.9tcf. 'Contingent' in this context indicates that the discovery is not yet considered commercial, hence Rockhopper's decision to delay production. There is no nearby market for gas and transporting it to the market by pipe or in liquid form requires considerable capital investment.
All four explorers have completed their reviews of seismic data and identified drill targets. FOGL has farmed out an operating interest to resources giant, BHP Billiton. Desire, meanwhile, has farmed out an interest to Arcadia, which will drill two wells, and Desire will drill an additional two wells on its own account.
Current plans suggest the next round of Falklands exploration will see six wells drilled in each of the North and South basins, but rig availability remains the single biggest hurdle to exploration of the South Atlantic. With keen exploration activity offshore Brazil and Africa, and continuing in the North Sea, rig contractors able to command high rates for multi-year contracts have had little incentive to release a rig to the Falklands. A Falklands contract would most probably cover less than a year, even if explorers collaborated and shared a rig, which looks the only commercially viable option given the high costs of mobilising a rig to and from the Falklands.
Fortunately for the explorers, demand for rigs has fallen recently with the oil price. Although the oil price has risen again in recent weeks, costs have yet to follow, which creates a window of opportunity. For the first time since Rockhopper floated in 2005, managing director Sam Moody is confident of being able to secure a rig.
The modest depths of Rockhopper's North basin licences will require no more than a semi-submersible rig, which Mr Moody estimates has fallen in cost to around $280,000 per day from a high of $450,000 per day last year. Given the similarities of their North basin licences, any rig secured by Rockhopper could be shared with Desire, and vice versa.
The rig requirements of the South basin explorers are more exacting. The greater water depths will demand either a dynamically-positioned, high-specification semi-submersible rig or a drill ship, of which there are only estimated to be around 25 to 30 in the world.
Rig slots are becoming available from late 2009, particularly for rigs suitable for the less demanding North basin, which suggests drilling should be possible from 2010. The 1998 wells were drilled in the southern hemisphere winter, which suggests that drilling, at least in the North basin, is possible throughout the year.
The four Aim companies aren't the only ones interested in drilling near the Falklands. In international waters to the west of the licences they hold, a consortium led by Spanish firm Repsol - which also includes Petrobras and BP-controlled Pan American Energy - is assessing a potential drilling campaign in two blocks. Lying to the west of, and on trend with, Borders' licence area, any success that this heavyweight group enjoys, including just drilling a well, will provide a great boost to Borders' prospects.
WHAT DO WE THINK?
The four Aim explorers offer investors the chance to participate in high impact exploration of one of the world's most alluring frontier oil and gas regions. All four offer massive upside potential, although the chance of total failure is also significant. Logistics remain the principal challenge in such a remote location, although any success in either basin is likely to prove enormous. Oil and gas fields in large frontier basins tend to behave like herd animals: the explorers are likely either to find nothing or they will find a lot.