A new round of exploration in the Falklands basin is well under way. The first drilling projects commenced in 1998 and new drilling began again in 2010.
Given the geology of the Falklands area, the UK dependency’s government is optimistic about the possibility of finding commercial deposits of hydrocarbons and the viability of the area as a petroleum producing province.
Current oil prices and concern about energy security will continue to drive energy policy and exploration in the area. It is notable that Argentinean oil reserves are predicted to last for 10.2 years and natural-gas reserves for 9.1 years.
Inevitably, this will be an important factor in relations between the UK and Argentina as they dispute the sovereignty of the islands. This has come to the fore recently with Argentina’s protests against the most recent round of exploration activities and its attempts to gain international support for its position, not least through an assertion of its sovereignty claims to the UN, as well as the passing by Argentina’s lower house of the federal congress of a draft law sanctioning companies which perform and/or support oil exploration activities “within the Argentine continental platform” without Argentinean consent.
Governance of the Falkland Islands has been controversial for more than 100 years. Since the 1982 conflict between the UK and Argentina, diplomatic relations resumed in 1990 and, on the whole, the countries’ relationship since then has been stable and friendly, as well as beneficial to both – the UK is the sixth largest investor in Argentina, with mining and energy forming a large part of that investment.
And Argentina is the UK’s third largest export market in Latin America, after Brazil and Mexico.
Having said that, the sovereignty of the Falklands Islands has remained firmly on the countries’ diplomatic agendas.
In 1995, in recognition of the potential mineral riches around the Falklands Islands, the governments of the two countries signed the Anglo-Argentine Joint Declaration of Co-operation over Offshore Activities in the South West Atlantic.
The declaration was not intended to be a settlement of the sovereignty dispute, but rather a mechanism to allow joint development of offshore hydrocarbon resources in the Falklands basin.
In 2007, Argentina withdrew from the joint declaration, arguing a lack of understanding between the two governments as to its interpretation. Argentina advanced its sovereignty claim further in 2009 by its submission to the UN Commission on the Limits of the Continental Shelf under which it is seeking a declaration on the extent of its continental shelf (to include the areas around the Falkland Islands) and in support of which Argentina has asserted “its legitimate and imprescriptible sovereignty over Isla Malvinas, Georgias de Sur and Sandwich del Sur and the corresponding islands and maritime areas”.
The UK is clear in its position that British sovereignty over the Falkland Islands is legal and reflects the wishes of the Falkland Islanders themselves.
At the time of writing, Argentina’s submission remains before the UN.
Lately, Argentina has again escalated its reaction to hydrocarbon exploration in the Falklands basin. Presidential decree 256/2010 was published earlier this year, requiring all vessels (this would include oil rigs and platforms) wishing to go to the Falkland Islands, South Georgia and the South Sandwich Islands through Argentinean waters, or using Argentinean ports, to first secure an authorisation from the Argentinean government.
The decree was firmly rejected by the UK Government as failing to comply with international law, not least the UN Convention on the Law of the Sea. Currently, the Argentinean congress is debating the enactment of a law that will sanction companies which, without obtaining prior authorisation from the Argentinean government, carry out and/or support hydrocarbon activities within the Argentinean continental shelf (including the area around the Falkland Islands) (the “ACS”) and companies with affiliates that carry out and/or support hydrocarbon activities within that area.
The law, which was recently passed by the lower house of the Argentinean congress, provides that Argentinean companies and foreign companies authorised to operate in Argentina (and their shareholders) shall need authorisation from the Argentinean government to:
Participate directly or indirectly in the capital of companies (foreign or national) that perform hydrocarbon activities within the ACS.
Carry out hydrocarbon activities within the ACS.
Provide services to such activities.
Engage in any business transaction with national or foreign companies which has as its purpose assisting them in performing hydrocarbon activities in the ACS.
The draft law includes sanctions for its breach, such as the loss of hydrocarbon concessions and the loss of any tax benefits/exemptions, and then goes even further by prohibiting the Argentinean government from entering into agreements or contracts with national or foreign companies, their shareholders or subsidiaries that directly or indirectly carry out hydrocarbon activities within the ACS without the required government authorisation.
Whether this most recent move by the Argentinean legislature will have any effect on ongoing exploration in the Falklands basin is still not clear. Indeed, the law has still to pass through the Argentinean senate, which may reject it outright, or amend or approve it – in which case, it will move on to the next stage in the Argentinean legislative process.
While this proposed Argentinean law might seem remote – after all, the grumblings between the countries have been a fact of life for decades now, and there is a limited number of players in the Falklands basin at the moment – should this new law come into force and the reserves in the Falklands basin prove commercially valuable, then those energy companies which have already invested heavily in Argentina will have to make a choice – which is exactly why the Argentinean government proposes putting these sanctions in place.
Penelope Warne is head of energy at international law firm CMC Cameron McKenna