As legions of investors await drill results from the South Falkland basin, there is growing Argentine rancour over the UK's sovereignty over the Falkland Islands. Thirty years after the Falklands conflict, the disagreement is not only over a sparsely populated land mass in the South Atlantic but also the black gold that lies beneath.
Not even the executives of the oil exploration companies can explain why the Falklands oil story continues to enthral quite as it does. Maybe it's the romantic isolation of the islands' location. Maybe it's the history of the conflict, which is being revived through the imminent anniversary, and Argentina is once again rattling its sabres in demand of sovereignty over the islands and their hydrocarbon wealth.
But, to date, that hydrocarbon wealth hasn't proved easy to unlock. The drilling campaign in the North Falkland basin drilled multiple wells between April 2010 and January 2012, yet returned just one significant discovery – Sea Lion – for Rockhopper Exploration. A series of drilling failures left fellow explorer Desire Petroleum close to ruin.
It was only after Rockhopper increased its interests in licences held by Desire and funded the drilling of an additional well to test whether Sea Lion extends into these licences – it does – that Desire made its first discovery. However, Desire will need to persuade sceptical investors to invest more funds if it is to drill further.
What is encouraging is that Rockhopper has declared Sea Lion to be commercial, which means it is big enough to be developed on a standalone basis if necessary. The latest mid-case estimate is that the find could hold 1.086bn barrels of oil, while engineering work suggests the field could produce at a stabilised rate of 80,000-90,000 barrels of oil a day.
Following the completion last December of the final appraisal well to test the scale of the Sea Lion discovery, an independent resource estimate is expected to be published in the coming weeks. Rockhopper now faces the considerable logistical and financial challenge of working out how best to develop its find. Given the remoteness of the discovery and the fact that South American nations are coming out in support of Argentina and denying port facilities to Falklands-bound shipping, this may not be straightforward.
North/south divide
Given the natural hiatus in North Falkland drilling activity, attention is now firmly focused on drilling in the South Falkland basin where Borders & Southern and Falkland Oil & Gas (FOGL) are exploring. The prospect sizes in the southern basin are typically an order of magnitude larger than those in the north, albeit the targets are more remote, water depths are greater and the lack of previous drilling heightens geological risk.
Only one well has ever been drilled in the southern basin: the unsuccessful Toroa well that FOGL drilled in mid-2010. However, Toroa was drilled as much for convenience as prospectivity as it lay in unusually shallow water for its acreage and was accessible to the Ocean Guardian rig that was at the time drilling for Rockhopper and Desire. The Toroa disappointment does little to dampen the prospectivity of the South Falklands.
The South Falkland basin thus remained essentially an unexplored 'wildcat' frontier until Borders & Southern started drilling its Darwin prospect in late January. One of the reasons it has taken so long to drill in the South Falkland basin is that the water depths and conditions demand the use of an ultra-deep-water, harsh-environment rig of which there are only around a dozen in the world.
After years of trying to secure such a rig, Borders finally contracted the Leiv Eiriksson, which had been drilling in Greenland for Cairn Energy. Due to technical problems associated with equipment on the rig, the results of Borders' first well have been delayed until mid to late April.
Investors wait with bated breath for this first true indication of the prospectivity of the South Falkland basin. Following this first well, Borders will drill a second well before passing the rig to FOGL to drill two wells on its acreage, including the potentially multi-billion-barrel Loligo prospect.
Any discoveries in the South Falkland basin will probably need to demonstrate at least 100m barrels of oil (any gas discoveries will need to be multiple trillions of cubic feet) to stand any chance of being commercial.
What's more, any discoveries will almost certainly need to be commercial on a standalone basis, in contrast to other offshore environments where it can sometimes be possible to combine discoveries that are individually sub-commercial by developing them through a common platform, or hub, that shares costs and thereby improves the economics of the combination. Given water depths in the South Falkland basin, however, any discoveries are most likely to be developed using floating production and storage vessels, rather than platforms that might be shared.
Nevertheless, the four wells in the area could open up a new frontier petroleum province with multi-billion-barrel potential. Investor interest will inevitably heighten through the spring as the first results are returned.
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Given the importance of drilling to driving share prices, our current Falklands favourites are the two South Falklands explorers. However, expect share prices to be volitile as the excitement surrounding the campaign is likely to produce lurches downwards as well as upward spikes (see graph): Borders & Southern estimates that the Darwin prospect it is currently drilling could hold recoverable resources of 300m-760m barrels of hydrocarbons. The company estimates that Stebbing, the second prospect it plans to drill, has recoverable resources of between 710m and 1,280m barrels. These first two prospects are geologically independent, which means that success or failure with the first well will have no impact on the chances of the second. Falkland Oil & Gas (FOGL) has agreed an option with an unnamed industry counterparty to allow the counterparty to acquire 25 per cent of FOGL's licence areas in return for paying a pro-rata share of 2012 drilling costs (expected to fund two exploration wells), plus a cash contribution of $40m (£25m) and payment of its pro-rata share of some $68m of preparatory costs. Should the option not be exercised before Borders & Southern makes a discovery that causes FOGL's share price to rise significantly, FOGL will have the right to halve the counterparty's interest to 12.5 per cent, or the counterparty could elect to pay an additional $10m to maintain its 25 per cent interest. FOGL should start drilling its Loligo prospect, which has prospective recoverable resources of over 4bn barrels, by mid-year. |
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| Having missed the opportunity to latch on to the end of the Desire Petroleum/Rockhopper Exploration drilling campaign using the same Ocean Guardian rig, fellow North Falkland basin explorer Argos Resources could face a lengthy wait before a rig opportunity comes around again. This won't do the share price much good, irrespective of how strong the company believes the results of its seismic surveys to be. |
