ROCKHOPPER Exploration updated the market last month with interim results, and with them, a revision to its development plan for the Sea Lion field.
As the company has evaluated this find over the past year or so it has issued a number of increases to reserve estimates. It now seems however that production will take place through a suite of 18 wells, down from a planned 24, which reduces plateau production estimates and net present value (NPV) for the field by around 25%.
That said, in the history of Falklands exploration this is far from the worst news we’ve ever seen: even factoring in the new production plan, analysts Cannacord Genuity still have an NPV of around $4billion on Sea Lion.
The Falklands first emerged as an area of interest in 1998 when exploratory drilling by Shell detected hydrocarbons with a well drilled in the North Basin. With oil at $20 per barrel however, appraisal, let alone possible development did not make any commercial sense.
Interest in the region faded, and over time the licences held by the majors were relinquished. From there, the baton passed to the small cap explorers: Rockhopper and Desire in the North Basin; and Borders & Southern along with Falkland Oil & Gas along to the south.
Shareholders have enjoyed and endured a rollercoaster of share price highs and lows over the years. Desire has a particularly high proportion of private investors on its register, with around 70% of its stock held by retail shareholders.
Rumours of success with Rachel prospect saw the shares peak at 168p in October 2010, only to fall to 12.5p by summer 2011.
Following six dry wells in a year Desire was left with only enough money for decommissioning work and some further seismic, identifying the Shona and Beverly prospects which appear similar in geology to the Rockhopper find.
Desire recently announced that it had struck a deal with Rockhopper (which in 12 years of Falklands exploration is the only thing that the company has struck, other than water).
The deal allows Rockhopper to farm into Desire’s blocks just south of Sea Lion, acquiring a significant stake in return for funding an exploration well – which according to an update issued in mid December has shown evidence of hydrocarbons.
For Rockhopper this is a reasonably opportunistic move. For a cash-strapped Desire, this is probably the least bad outcome. Finding itself caught between a rock (hopper) and a hard place, this is really the only way for Desire to stay in the game.
In contrast to the much talked about North Basin, the south is relatively under-explored. Borders & Southern and Falklands Oil & Gas are embarking on a combined drilling programme in 2012 using the Leiv Eiriksson rig which was released in December by Cairn after a disappointing run in Greenland.
B&S and FOGL will both be hoping that the Eiriksson has better luck in the South Atlantic where B&S have first go, with two wells scheduled, before FOGL spuds its maiden well on the Loligo prospect around April or May.
Success with the drill-bit is potentially not the only hurdle to be overcome by Falkland explorers: sovereignty of the territory remains a contentious issue for the Argentines, perhaps unsurprisingly given that Argentina is facing an acute energy crisis.
The country has moved from being an energy exporter to being increasingly reliant on imported liquefied natural gas.
A domestic think-tank reported recently that over the last five years Argentina has turned an energy surplus of $5.6billion into a deficit of $3billion.
Following Rockhopper’s success with Sea Lion, the potential for any further commercial discoveries in the region has seen the rhetoric from Buenos Aires ratchet up considerably.
Perhaps borrowing her phrasing from Nicolas Sarkozy, Argentina’s President, Cristina Kirchner, recently called Britain a ‘crass colonial power in decline’.
My Christmas gift to my wife this year included the back-catalogue of albums from the cast of the TV show Glee.
Whilst I am not personally a fan of the show-choir warblings of these American faux-teenagers, one of their cover versions did seem to stand out as a succinct repost to such harsh words from our G20 partner:
Don’t Cry For Me Argentina’ – but then it has often been said that I am a loss to the international diplomatic scene.
Alan MacPhee is an investment manager at Brewin Dolphin
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