Exploratory Drilling Begins in Waters Off Falkland Islands

U.K. Firm Starts Drilling

The U.K. independent Desire Petroleum has released a statement announcing that it has spudded the Liz 14 /19-A exploration well in the North Falkland Basin on 22 February, following the arrival of the Ocean Guardian rig a few days earlier. The company said that the well is being drilled to an estimated target depth of around 3,500 metres and that drilling operations are expected to take approximately 30 days. Desire's partner Rockhopper Exploration is planning to use the rig to drill a further two wells in the North Falkland Basin, while Falkland Oil and Gas (FOGL) has secured a slot to drill a well in the East Falklands Basin (see Argentina: 15 February 2010: BHP Billiton Secures Drilling Slot; Other Companies Caught in Political Fallout over Falklands Exploration).

The news marks the start of a new exploratory campaign in waters off the Falkland Islands. No wells have been drilled in the North Falkland Basin since 1998, when six wells were drilled, five of which found indications of oil, but that campaign was abandoned as oil prices at the time meant that it was not considered commercially viable. In contrast, the East Falklands Basin has seen no prior drilling.

Political Tensions Rise

The arrival of the Ocean Guardian rig was preceded by an increase in tensions between the U.K. and Argentine governments with Argentina expressing an "energetic protest" and both sides reaffirming their claims to sovereignty over the Falkland Islands (see Argentina: 3 February 2010: Argentina Protests as U.K. Company Prepares to Start Drilling Off Falkland Islands). Argentina is attempting to gather international support for its condemnation of the oil drilling operation with leaders from 32 Latin American and Caribbean countries, currently attending a summit in Mexico, expected to sign a resolution later today backing Argentina's claim to the islands. Earlier Venezuela's President Hugo Chávez expressed solidarity with his political ally, the Argentine president Cristina Fernández de Kirchner, by calling for the "return" of Las Malvinas, as the islands are known in Spanish. Meanwhile Argentina's foreign minister Jorge Taiana plans to raise the issue with UN leader Ban Ki-moon later this week. In addition to diplomatic moves, Argentina, although not yet raising the possibility of trade sanctions, has taken some retaliatory action against U.K. companies with the signing last week of an executive decree imposing controls on maritime traffic to the Falklands Islands. Under the decree, all ships planning to move between ports in continental Argentina and ports on the Falklands, or that wish to cross Argentine territorial waters on their way to the islands, are obliged to seek prior permission from the Argentine authorities.

None of these actions is likely to make much of a difference. Although the need to bring in equipment from further afield raises costs for exploration and production (E&P), the controls on shipping will not prevent drilling from going ahead. Indeed the earlier suspension of an oil co-operation agreement by Fernández de Kirchner's predecessor, President Nestor Kirchner, had already effectively ruled out the possibility of Argentina benefiting from oil exploration activity in the Falklands either by creating job opportunities for Argentine oil service companies, combining exploration efforts in Argentine and U.K. waters, or by allowing the country to receive any future oil production from this area. Meanwhile the intransigence of both countries on the sovereignty issue and the reluctance of the United Kingdom to even consider taking the dispute to the International Court of Justice (ICJ) at The Hague, Netherlands, means that the prospect of a diplomatic solution remains further away than ever.

Outlook and Implications

Rarely has an event like the start of drilling attracted such hyperbole, from coverage in U.K. tabloid the Sun featuring a picture of a warship to numerous reports that the Falkland Islands could hold up to 60 billion barrels of crude. The reality is far less dramatic. While it is true that the imminent start of drilling has increased diplomatic tensions between the two countries and nationalistic statements have popular appeal in both countries, there is not the domestic appetite for a re-run of the 1982 conflict and the language used by both governments has been fairly measured in tone with neither expressing military intentions. On the question of potential reserves, the 60-billion figure and the more modest 3.5-billion figure cited by Desire Petroleum remain both highly speculative until drilling has been completed. Nonetheless, even a modest find could transform the lives of islanders and risk further stoking of tensions with Argentina.