Kate Mackenzie Falklands oil questions are about payloads, not conflict


It’s a big week for the Falkland Islands. A UK small oil company, Desire, began drilling in deepwaters about 100 miles north off the islands on Monday, and more British companies will begin drilling in the coming months.

The renewed interest in oil reserves have ratcheted up diplomatic tensions between Argentina and Britain over the Falklands. Yesterday, heads of state from every the Latin America and the Caribbean nations issued statements supporting Argentina’s claim over the Falkland Islands. Today, Argentina’s foreign minister Jorge Taiana, will meet with UN secretary general Ban Ki-Moon to press his country’s case for sovereignty.

Memories of the 1982 Britain-Argentina conflict are being revived, but the bigger question seems to be over whether the ‘wildcats’ about to drill in the area will make good on their bets.

The Times however cites a (UK) government source saying:

…a submarine had been made available to supplement the routine military presence, although it is not yet in waters off the Falklands. The Ministry of Defence said that HMS York, a frigate, was expected to remain there for the foreseeable future. The Falklands air defences were quietly upgraded late last year with the arrival of four Typhoon jets.

However the general view seems to be that a repeat of the 1982 war is unlikely – Argentina might be ramping up its protests about the British presence, but as a former ambassador to Argentina, John Hughes, wrote in the Guardian, successive governments have said they don’t want another conflict, and don’t appear any closer to mustering the military might required anyway. Argentina has a few political and financial problems right now that are probably making a diplomatic row even more attractive.

JBC Energy pointed out that today’s higher oil prices make it more likely that hydrocarbons can be recovered economically – but it’s still mostly small oil that is interested:

However, the risk to the campaign is still considerable and BHP Billiton is the only major oil company to spud a well during this year’s venture. Meanwhile, political tensions between the UK and Argentina over the territory, which is known by the latter as the Malvinas, have regained momentum in recent months. However, an escalation of the situation such as seen in 1982 seems highly unlikely.

The stakes are high for four of the small UK oil companies (Desire, along with Rockhopper, Falkland Oil and Gas, and Borders and Southern) leading the exploration in the waters, as Richard Rose told the FT earlier this month:

“Considerable capital has been raised for drilling in the Falklands…

“All four companies are single-asset plays. If it doesn’t work, there is nothing else in their portfolios to fall back on, but if they are successful, the upside is huge.”

We should soon have a better idea of just which way it’s likely to go.

Related links:

Oil plays in 2010: Greenland and the Falklands compared (FT Energy Source)
Gotcha! The Falklands Islands revisited
(FT Alphaville)
Summit backs Argentina’s claim over Falklands (FT)
UK company begins drilling off Falklands (FT)