Oil exploitation in Falklands Islands still distant possibility

Argentina has vowed to fight British exploitation off its coasts The prospect of an oil bonanza around the Falkland Islands is heightening tensions between Britain and Argentina, but commercial exploitation of reserves remains a distant possibility, industry experts say.
Diplomatic friction between London and Buenos Aires has intensified since 2010, when London first authorised oil prospecting in the waters around the South Atlantic archipelago.
Islanders suspect Argentine President Cristina Kirchner's often-emotional pursuit of Buenos Aires' sovereignty claim over the Falklands is designed to distract domestic attention from the country's mounting economic woes.
Amid the tension, residents of the islands will vote in a referendum on Sunday and Monday, aimed at sending an unambiguous message about their desire to remain a self-governing British overseas territory.
The discovery of oil around the Falklands in 1998 transformed the inhospitable archipelago into a valuable economic asset. But at that stage, world oil prices languished at just $10 per barrel.
The global oil market subsequently spiked to a record high above $147 per barrel in 2008 amid tight supplies, demand growth and geopolitical jitters.
And in early 2010, with oil prices remaining at elevated levels, five British companies -- including Desire Petroleum and Rockhopper Exploration -- began hunting for hydrocarbons in Falklands exclusive economic zone waters.
"There have only been two major discoveries of so far: one in Rockhopper's Sea Lion field, and another one by Borders & Southern, with gas condensates, and it seems that the development at Sea Lion has gone ahead," IHS Global Insight analyst Juliette Kerr told AFP.
"They would not be able to build a pipeline to Argentina, which would be a natural market."
Kerr said this would inevitably make oil production more expensive as they "would have to ship it" to Europe or other region.
Rockhopper, which takes its name from one of the species of penguin so emblematic of the islands, estimates there are 321 million barrels accessible within the Sea Lion field.
The London-listed firm expects to extract the first drops of refined petroleum by 2017 and to begin pumping 30,000 barrels a day in 2019.
With much of the region still largely unexplored and the forecasts volatile, some experts estimate that more than eight billion barrels may exist around the Falklands, almost three times the amount currently in Britain's sector of the North Sea.
However much the industry might be eventually be worth, the proceeds are unlikely to flow towards Argentina, some 400 kilometres from the Falklands, with Buenos Aires claiming the drilling is an illegal exploitation of their continental shelf.
The five fledgling British oil exploration companies, shrugging off the legal warnings from Argentina, have meanwhile sought to forge alliances with larger, more mature operators.
"We are often looking at larger companies to give independent validation of smaller companies' positions, so their entry was seen as very positive," Laura Loppacher, markets analyst at US investment bank Jefferies, told AFP.
"It was always clear that as the industry matured in the Falklands, the type of companies leading the charge would need to mature as well, so seeing these companies come in is certainly a step in the right direction," she added.
In July, London-listed firm Premier Oil took a 60-percent stake in Rockhopper operations north of the islands with a total investment of $1.0bn.
Also last year, British peer Falkland Oil & Gas handed leasing contracts to US firm Noble Group and Italian energy company Edison, which is controlled by French energy giant EDF. Together, Noble and Edison have pledged to invest up to $320m in the region.
Noble's arrival may tempt other international companies to follow suit.
Analyst Kerr meanwhile added that, given the legal threats from Argentina, "tensions are likely to remain high between the two countries," although this "would not have any practical impact on the companies."
"We do not anticipate a return to the hostilities we saw in the 1980s, but they have taken steps to make it more difficult for companies, like threatening of law suits, inspections of ships (docking in Argentina) -- but the options are limited."
Meanwhile, Sukey Cameron, who represents the Falklands government in London, told AFP that the islands could not count on oil. The Falklands currently rely on their fishing industry, a growing tourism sector and traditional sheep farming.
"It's looking good, but it's certainly not a certainty. We always say we have to be as prepared for oil as for not having oil. Either will present us with challenges," she said.
"We have got lots of other things we could be doing to make sure that we continue to keep the islands developing and economically self-sufficient for many generations to come."