London (Platts)--29Mar2010/715 am EDT/1115 GMT

Companies involved in this year's high-profile drilling campaign around the Falkland Islands in the South Atlantic were rocked Monday by news that the first of a number of planned wells had proved to be a disappointment.

An announcement by Desire Petroleum that it had found poor reservoir quality with its well on the Liz prospect sent investors running for cover, with the company's share price in London losing half of its value.

Desire's partner in the well, Rockhopper Exploration, also saw its shares slump, as did Falkland Oil and Gas, a company not involved in Liz but planning to test its own prospects in the area in the coming months.

Desire and Rockhopper Exploration started drilling the Liz well, the first in Falkland waters for 12 years, in February, and encountered their main target at a depth of around 2,550 meters, Desire said in a statement.

"Subsequent logging operations have shown that oil may be present in thin intervals but that reservoir quality is poor," the company said.

"Deeper gas shows have also been encountered while drilling, particularly below 3,400 meters and these have still to be evaluated by wireline logging and sampling," it added.

"Until the logging is complete and the results analysed it will not be possible to determine the significance of the hydrocarbons encountered and whether the well will need to be drilled deeper, suspended for testing or plugged and abandoned."

The well is expected to be completed later this week, when Desire said it would make a full announcement. The company had been hoping to find up to 660 million barrels oil equivalent of recoverable reserves at Liz.

Desire, which is exclusively focused on exploring the North Falkland basin, saw its shares lose close to half of their value on the London Stock Exchange after the drilling result was announced, and closed down 49.5% at 49.5 pence (74 cents).

Desire's shares have been significantly above this level since the company announced a deal in September last year to secure the drilling rig currently being used on Liz.

By comparison, Rockhopper escaped lightly, but it still saw its shares end the day down 16% at 45 pence.

Once the Liz well is completed, Rockhopper is due to take control of the Ocean Guardian rig and use it to drill its Sea Lion and Ernest prospects in the same North Falkland basin. Falkland Oil and Gas, which is not a partner in Liz but is nonetheless betting heavily on hydrocarbon success in the area, saw its shares fall 11% to GBP1.21.

Falkland Oil and Gas and its partner BHP Billiton are lined up for the fourth drilling slot with the rig, and plan to test the Toroa prospect in the East Falklands basin.

Subsequent slots will test more Desire prospects in the North Basin.

The oil hopes of the Falkland Islands, a UK self-governing overseas territory, had effectively been in limbo since Hess, Shell, Lasmo and Lundin drilled six disappointing wells in the northern basin in 1998.

All that changed when Desire agreed the rig deal with Diamond Offshore in September last year.

But even before the drilling started, the renewed oil exploration around the Falklands provoked an angry reaction from Argentina, which claims sovereignty over the islands.

Argentina invaded the Falklands in 1982 but was defeated by British forces after a two-month war.

The country has told the UK that it considers the current exploration efforts being undertaken by Desire and the other companies to be illegal.

--Richard Swann, richard_swann@platts.com