The history of what we do is paralleled in the best movies. The Westerns, Sci Fi and all that is daring-do. As I go around the world picking up more information about oil and gas exploration the more I admire those who started it all. One of the latest such roles of the dice is of course in the waters around the Falkland Islands.
The evidence is that there is much to be gained from drilling in the South Atlantic. As always the environment is a challenge and as is often the case there are simmering disputes about legality and rights.
Currently we wait to see if the conditions are favourable to begin production of the estimated 1 billion barrels of oil that are down in the North Falklands Basin. The plan is to use Floating Production Storage Offloading (FPSO) to service the platforms, but of course the price of oil isn’t that good so how far back production will be pushed is at present not known. The fact is that the largest prospect in British territorial waters outside of the North Sea faces and an uphill battle get underway.
It truly is a case of holding your breath particularly, if you are an investor in the companies that have licences to search the frigid waters of the South Atlantic.
Argentina and the Oil
Many of our colleagues work in areas that are fraught with political wrangling and downright dangerous conflicts. Where the production sites in the Falkland Islands sit is not as day to day threatening as many places we work but it has had a volatile past. The uncertainty about future oil and gas exploration here is more to do with the global political considerations about the island’s sovereignty than in local pressure.
The islands were first charted by a British captain in 1690. They are inhabited by an independent people who claim British connections. They were given the opportunity to vote away from the UK and overwhelmingly voted to remain yet that doesn’t stop nearby Argentina from claiming rights to not only the islands but the people who live on them.
International law requires that in order for a country to absorb another, the people living there have to agree or at least the majority of them do. This process was most recently observed in the Scottish referendum. You didn’t have to be Scottish to vote, you had to be a resident of Scotland.
The alternative is to establish that the Falklands are a ‘stolen’ territory. In order to do that Argentina would have to show their prior claim and right in history. This claim is at best ambiguous and I will not go into the claims and counter claims, but the future of the islands is unlikely to see an Argentine flag flying over it.
In 1982 Argentina attempted to force the issue and this led to British military being deployed to oust them. Ever since force of arms has been a back seat option to political pressure and Argentina’s attempts to gain control have been relentless.
This effort has come in many forms, the most often used has been to block any major development of the islands, that includes oil. Significantly the Argentine government has got previous form for nationalising foreign oil assets based in their country. This is probably the reason that those daring to develop production 130 miles off the shores of the islands bring almost everything they need across the sea from Aberdeen.
In addition, it could well be why the operators are smaller than the norm. The big outfits could lose big if Argentina decided, through its courts, that oil exploration was illegal. The rule seems to be if you want to isolate yourself from Argentine action don’t put anything on the mainland you cannot afford to lose.
It also should be said that Argentina is not unsupported in their claim on the islands. Russia shows them sympathy as on occasions have other nations including the USA. The sticking point was and is the will of the people. In the late 1960s and again a decade after that the UK government was happy enough to walk if not run towards handing over the islands. This was never because they supported the Argentine claim more because the cost of servicing islands so far away was a heavy burden.
An Argentine airstrip was built in the 1970s and that prompted the islanders to strongly petition London not to negotiate a change in sovereignty.
The Upside, Tax Breaks
Some advantages do exist. For a start the tax is not levied by the UK but by the government in the island’s capital Port Stanley. We have seen this before in many parts of the world. The islands have some literally home grown revenue but if the oil pays off their financial and even sovereign future could be assured so they want to encourage exploration. The overall tax paid on a barrel that does come out of the area is likely to be 34% lower than one that comes out of the North Sea.
Another plus is that though the neighbour might be annoyed the islands are not small. They can support increased onshore facilities and because of the history they have a very large British military presence to keep many of the threats that exist elsewhere at bay. The local economy and transport has come a long way since before the war and is a good base for future development. Finally, unlike Nigeria and many places in the Middle-East, there is one government to deal with and no local rival factions to placate.
The Future of Falklands Oil
The reserves at 1 billion barrels are but a small amount when compared to to the North Sea’s 16 billion but it is an area worth a watch. Conditions are similar to those closer to home. The day to day obstacles have been closely likened to the North Sea albeit the geology is different. So if you hear that operators like Britain’s Rockhopper have begun production and work is scarce elsewhere – a long bus man’s holiday in the South Atlantic could be a reasonable consideration.