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Rigging the Falklands oil race

Created:
18 March 2008
Written by:
Daniel O'Sullivan

Shares in Aim-quoted Desire Petroleum took off recently on news that it has recruited a farm-in partner to help fund the considerable cost of mobilising a drilling rig to explore three oil prospects offshore of the Falkland Islands. Shares in fellow Falklands explorers Rockhopper Exploration and Borders & Southern Petroleum also rose strongly, on hopes that all will benefit from having a rig in the remote South Atlantic region. But the reality is not that simple.

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Desire has not yet named its partner. Non-executive director Stephen Phipps says this will follow Falkland Islands government approval of the deal, and he will not confirm market gossip that the incomer is privately-held London-based oil trading company Arcadia Petroleum. If Arcadia is the partner, its shared ownership with offshore drilling specialist Seadrill may have sealed the deal. Rig rig mobilisation is the major hurdle facing any company exploring offshore of the Falklands.

That's because any drilling operator diverting a rig to the islands would require considerable recompense due to time lost on the long voyage south when the rig could otherwise be earning money for its owner drilling prospects closer to home. And current sky-high rig rates due to a shortage of kit and frenetic drilling activity make the costs even greater. So pooling drilling requirements to create an economically-viable drilling campaign is seen as the solution. Desire did nothing to dispel this impression with a press release noting that "there is now the potential to hire a rig for a minimum six-well drilling programme, thus defraying mobilisation costs for all parties". Desire's £20m cash gives it sufficient funding for for two wells, its new partner is prepared to fund two wells, and in addition there are the two wells that Australian natural resources behemoth BHP Billiton contracted to fund when it agreed to partner Aim-quoted Falklands Oil & Gas (FOGL) last year.

It all sounds good on paper, and indeed all the Falklands explorers named above say they are prepared to work together on rig-sharing if the eventuality arises. That is a big if, however, with FOGL looking the likeliest party pooper. While rig-sharing with Falklands peers is likely, should BHP secure a unit for any meaningful length of time, Tim Bushell, chief executive of FOGL, says such a contract is only one possibility.

Another possibility being considered in earnest by BHP is snagging a rig for just the briefest of stopovers en route from an already-scheduled location changeover between West Africa and Brazil, or vice versa. Such a deal would only be possible due to BHP's heavyweight contacts, negotiating strength and cash-rich persuasiveness. The resultant window would allow no more than a couple of wells to be drilled just for BHP/FOGL, with other operators seeing no benefit.

Mr Phipps admits BHP/FOGL might well go it alone. "I don't think that they need us as much as we would rather need them!" he says. But both he and Rockhopper managing director Sam Moody point out that it might yet be BHP/FOGL left out in the cold rig-wise. Both Desire and Rockhopper are exploring in the basin to the north of the islands, which is shallower and calmer than the southern basin that BHP/FOGL and Borders & Southern are in. As such, the northern operators could get by with a lower-specification and cheaper rig - 'third generation' as opposed to 'fifth generation' semi-submersible. If they locate one of these on a viable contract, they will go ahead on their own.Whatever happens, all parties agree that offshore drilling should finally be underway by the beginning of 2009, if not earlier. This gives time for Borders & Southern to join the drilling party if a consortium solution emerges. Having just completed seismic surveys, chief executive Howard Obee says promising prospects should be identified by summer.

Should any of these companies actually strike oil, the share price uplift would be immense. Mr Bushell says if just one of his 10 worked-up prospects - selected from hundreds of promising leads - comes in as a 500m barrel discovery, then presuming a flat oil price of $50 per barrel, FOGL would be worth £10 per share. Using the same oil price, Mr Moody believes that the net present value of a 100m barrel discovery on his licences is around $1bn. Splitting that £500m-equivalent among Rockhopper shareholders equals some £6.60 per share, although, by the time of drilling its share may have been diluted through a farm-in. It looks like there are some very exciting times ahead for this band of oil-exploration companies.

SEE ALSO:

For more on how the valuations of the Falkland oil explorers compare, see A crude yardstick

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