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Falkland Islands Oil Could Triple UK Reserves

Thirty years after Margaret Thatcher fought a 74-day war with Argentina over the Falkland Islands, the prospect of an oil boom is reviving tensions.

Oil explorers are targeting 8.3 billion barrels in the waters around the islands this year, three times the U.K.’s reserves. Borders & Southern Petroleum Plc (BOR) will drill the Stebbing prospect next month, one of three Falkland wells that Morgan Stanley ranks among the world’s top 15 offshore prospects this year. Meanwhile, Rockhopper Exploration Plc (RKH) is seeking $2 billion from a larger oil company to develop the Sea Lion field, the islands’ first economically viable oil find.

“The area is underexplored and highly prospective,” said New York-based Morgan Stanley analyst Evan Calio. “These could be like the high-impact wells in Ghana and Brazil a few years ago that opened up a whole host of basins.”

A major drilling success will further raise the political temperature as Argentina maintains its claim over the U.K’s South Atlantic territory, 300 miles (483 kilometers) from the Latin American coast. President Cristina Fernandez de Kirchner said Britain is taking her country’s resources, while Thatcher’s successor David Cameron yesterday accused Argentina of a “colonialist” attitude that didn’t account for islanders’ rights.

Cameron has approved contingency plans to bolster U.K. troops on the islands, and Prince William, a search and rescue pilot and the second in line to the British throne, may spend six weeks there this year, the Times reported today in London.

Not Negotiable

“We want to have a full and productive relationship with Argentina,” said Foreign Office spokeswoman Sophie Benger in an e-mailed response to questions. “Whilst the sovereignty of the Falklands is not up for negotiation, there is still much we can do together.”

The world’s largest oil companies like Exxon Mobil Corp. and Royal Dutch Shell Plc face a dilemma: whether the potential of a virgin basin outweighs the risk of a worsening international dispute. While producers with interests in Argentina, such as BP Plc, may be put off, others will want to participate, said Tim Bushell, chief executive officer of Falkland Oil & Gas Ltd. (FOGL), who’s looking for drilling partners.

“Big oil companies are used to dealing with political risks, and bigger ones than some saber rattling by Argentina,” Bushell said in a telephone interview, declining to name the companies he’s talking to. “For every BP, there are other major companies that don’t have an interest in Argentina.”

Shares Rise

Falkland Oil & Gas rose as much as 5.8 percent in London and traded at 49.25 pence as of 1:07 p.m. Rockhopper climbed 4 percent to 329.25 pence.

The Falkland Island government, which manages the territory’s mineral rights for the 2,955 islanders, says the big producers are interested and talking to the companies already active in the region. Of the five U.K.-based explorers that have drilled or plan wells, the largest, Rockhopper, has a market value of 899 million pounds ($1.4 billion).

“The Falklands is at a stage where a big company can take a large share in what could be a big oil province,” said Stephen Luxton, the Falkland Islands’ director of mineral resources. “There is an active program of marketing by the companies here. There are discussions going on, though we can’t name names.”

Falkland Oil & Gas plans to drill the Loligo prospect later this year, a well targeting 4.7 billion barrels of oil. Named after a Patagonian squid, it’s the second-most prospective well planned worldwide this year after one in Namibia, according to Morgan Stanley. The company’s Darwin prospect will follow and ranks sixth on the U.S. bank’s list.

Darwin, Stebbing

Borders & Southern will start drilling the Darwin prospect by the end of January, which seismic surveys suggest may hold as much as 760 million barrels of oil and 3 trillion cubic feet of gas. Stebbing, the target of the company’s second well, may hold as much as 1.2 billion barrels.

Together, the four wells planned for the Falklands this year are searching for about 8.3 billion barrels of oil. The Jubilee field, which was discovered in 2007, propelled Ghana into one of the world’s top 50 oil states. Brazil’s Lula field, drilled in 2006, holds an estimated 6.5 billion barrels of oil equivalent.

“There could be significant volumes down there and it would open up a new hydrocarbon province,” Borders & Southern CEO Howard Obee said in an interview. If the first two wells are successful, “we’d like to do a big drilling program, not only to appraise what we’d find but also drill up additional prospects. To do that, we’d need quite a bit of money.”

Selling Stakes

While the company will probably be able to sell more shares to determine the size of a discovery in this campaign, it may have to sell stakes in prospects to develop them, said Tracy Mackenzie, an analyst at broker Brewin Dolphin in Edinburgh. Borders & Southern holds a 100 percent interest in its fields.

Rockhopper says its Sea Lion discovery, made in 2010 and which may have more than 400 million barrels of recoverable oil, is commercial and will be developed. Chairman Pierre Jungels said last month that the company is showing drilling data to potential partners. The company this month ended a 10-well campaign that lasted two years. It has $100 million in cash after raising 46.5 million pounds ($72 million) in a share placing in October.

That’s just a fraction of the $2 billion the company reckons it will need to get the oil to market. Developers will have to build a floating production and storage unit to load the crude onto tankers. Cairn Energy Plc, Premier Oil Plc and Noble Corp. may be interested in investing, Bank of America Corp. analyst Alejandro Demichelis wrote in a Jan. 16 note.

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