They may be situated around 8,000 miles away from the Square Mile, but the Falkland Islands are generating a fair bit of excitement in the City of London as the start of a drilling campaign nears.
The British Geological Survey has estimated the area may contain up to 60billion barrels of oil equivalent.
The Ocean Guardian semi-submersible drilling rig is due to arrive in the south Atlantic, fresh from the Cromarty Firth, in the next few days and this could herald the beginning of a new love affair between the UK and the Falklands.
Desire Petroleum is first up to drill in the shallow-water North Falkland Basin and Rockhopper Exploration is next in line in this area.
Falklands Oil and Gas, in association with BHP Billiton, has a third option on the Ocean Guardian for its shallow water acreage in the east – its licence extends to the southern basin also.
Borders & Southern is expected to line up its own rig to explore its deep, water acreage in the southern basin.
Desire said recently that independent analysis had concluded that it had more than 3billion barrels of oil equivalent recoverable resources in its top 10 prospects.
Of course, the North Falkland Basin is not unchartered territory.
An initial programme was conducted by various companies, including Amerada Hess and Shell, in 1997-98, just as an oil-price slump began to bite.
Of the six wells, five recorded oil or oil and gas shows, but that was the last drilling until now.
The southern basin was left completely unexplored at this time, but we now have a relatively steady oil price, technology has improved and there is a new-found momentum to explore in the region.
Since then, there has been a great deal of seismic work done which has given the explorers a lot more confidence about where to drill and how to drill.
Another contributing factor which has bolstered this new drilling campaign is that rig rates have come down in recent times and it is apparent Desire has felt confident enough to contract a rig at a price they are comfortable with.
With individual well costs estimated to be in the region of $25million-$30million (£16million-£19million) in the north basin and $30million-$35million (£19million-£22million) in the south, all four companies have successfully raised finance in the City to complete the first exploration drilling campaign.
The oil price is about $70 a barrel but if oil is found it’s believed extraction could be viable as low as $25 a barrel.
The Falkland Islands government has set corporation tax at 26% on profits plus a 9% royalty on production, making it one of the most favourable fiscal regimes in the world for exploration.
Perhaps predictably, the Argentine government is making grumbling noises concerning the disputed sovereignty of the islands and in December passed a law which attempt to incorporate the Falklands within its borders.
This followed a claim lodged at the United Nations to establish ownership seabed surrounding the islands.
The UK position is clear – sovereignty is not up for discussion and the Foreign Office made its feelings known in a recent diplomatic note to the Argentine ambassador in London.
With the military ever-present in the islands – its base a 40min drive from Port Stanley – the explorers will have peace of mind as they embark on the drilling programme.
So what might this all mean for the UK oil and gas sector if results point toward decent reserves which merit a full-on extraction phase?
If it all comes good it will be some years before exploration ends and production starts, but it’s safe to say a large number of Aberdeen-based service companies have products, skills and experience which are easily transferable to the South Atlantic.
Many north-east companies which have evolved as the North Sea has matured will be in a good position to expand their business in the South Atlantic region.
There is of course the sheer logistics of getting back and forth to Stanley, but the rewards may outweigh that particular obstacle.
AGR, one of the largest independent well management firms in the world, has been contracted by Desire and Rockhopper to provide logistical support and run a six-well drilling programme in the North Falkland Basin.
AGR already has Aberdeen personnel in place and others from the north-east have deployed staff in support of the local Falklands supply base operators, Byron McKay Port Services. It’s only a trickle at the moment but as knowledge of the province, its challenges and opportunities filter back to Aberdeen, I am sure we will hear more Doric mingling with the local Port Stanley accents.
As someone who has been travelling to and from Port Stanley on business since the late 1980s, I share the cautious optimism of the islanders that the arrival of the Ocean Guardian could herald the start of a sea change for the Falklands economy.
If the drilling campaign goes well the oil industry will open up the islands to an influx of investment, job creation and with increased commercial flights, even spinoffs for its small but vibrant tourist industry. Time will tell.
Gavin Farquhar is a partner in McGrigors’ energy and infrastructure team. McGrigors is the only UK law firm to have a presence in the Falklands.
Recommended for you
