The Falklands War 30 years ago had many causes, but the potential for offshore oil reserves was always thought to be one of the reasons why Argentina tried to reclaim the archipelago by force. Now, drilling actually has begun and so far, the results are far from spectacular. In addition, Argentina’s political stance isn’t helping. Robert Perkins discusses the E&P landscape in this week’s Oilgram News column, At the Wellhead.
Diplomatic posturing over Falkland Islands sovereignty has not been the only thing keeping the disputed South Atlantic islands in the headlines this year.
The frontier play has been abuzz with news flow from the oil industry in recent months, with the entrance of deep-pocketed explorers and disappointments on some of the area’s biggest drilling prospects.
The political offensive by Argentina’s President Cristina Kirscher had already begun to ratchet up well before the latest drilling campaign off the archipelago led to Rockhopper Exploration’s landmark Sea Lion oil discovery in 2010.
But, so far, drilling off the Falklands has come nowhere close to realizing the multi-billion barrel oil potential that the region has been predicted to possess by British geologists more than a decade ago.
The Sea Lion find holds some 400 million barrels of recoverable oil, a huge discovery for the North Sea but not so impressive for the remote British outpost.
More recent drilling in deepwater to the south of the islands suggest significant—but not giant—gas and condensate fields.
But more wells remain to be drilled over the coming years and the recent entrance of larger explorers in the region is a testament to the promise still seen in the region.
The US’ Noble Energy farmed into acreage in August, marking the first foothold by a US oil company in the Falklands since Amerada Hess took part in an largely unsuccessfully Shell-led drilling campaign in 1998.
Under its agreement, Noble has a 35% operating stake in most of the blocks held by Falkland Oil & Gas (FOGL) to the south and east of the islands. The company plans to spend $180-$230 million there over the next three years targeting up to 6 billion barrels of potential resources.
“We believe the Falklands is an area where the above-ground risk is very manageable,” Susan Cunningham, Noble upstream chief, told investors earlier this month. “The regulatory environment is sophisticated and stable, and the financial terms are attractive.”
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The company is currently targeting more than 1 billion barrels of prospective resources in the Scotia prospect, a mid-Cretaceous fan play, where drilling was spudded last month.
Scotia’s targeted depth is 5,000 meters and Noble believes it has a 30% chance of success, Cunningham said, adding that initial results from the well are expected by the end of the year.
If an exploration well proves to be successful, Cunningham said that oil production in the Falkland Islands could begin by 2018 or early 2019.
One recent drilling disappointment, however, came from FOGL’s own massive Loligo prospect, by far the biggest target drilled off the Falklands to date and a key test of deeper waters to the south of the islands.
FOGL declared Loligo a gas discovery last month but said it was too early to estimate the size of the find. FOGL had hoped Loligo could hold up to 3.5 billion barrels of recoverable oil, or alternatively, some 12 Tcf of gas and 200 million barrels of liquids.
The entrance of Houston-based Noble offers the Falklands greater insurance against Argentine claims on the British overseas territory and raises at least the possibility of US political backing for the new investor.
Washington has at least backed the principle of self-determination for the Falklanders, the key—but moot—UN concept that underpins the UK’s own political line on sovereignty over the islands.
Meanwhile, mid-sized UK explorer Premier Oil has taken 60% control of the Sea Lion discovery from Rockhopper in a $1 billion deal which brings the prospect of a first oil development off the remote archipelago a step closer.
Premier estimates the total cost of developing Sea Lion would be some $5 billion, including the acquiring of a floating production storage and offloading unit which would have a gross peak production of 80-85,000 b/d.
Premier and Rockhopper said they have agreed to undertake a front-end engineering and design study to optimize the development area, and plan to submit the final development plan by second half of 2014, aiming to bring the field on stream in late 2017.
In addition to giving such a high-risk development some much-needed credibility, Premier brings its own financial mass to the party. The company has said it would be able to fund the development with combination of existing credit facilities and cash flow from existing operations.
But there are still the political hurdles to contend with.
YPF, Argentina’s recently nationalized oil company, is considering teaming up with Venezuelan oil giant PDVSA to explore offshore blocks adjacent to the Falklands, a move designed to further antagonize the UK government.
While Argentina’s saber-rattling over the Falklands has been mostly rhetorical, the country will also likely step up efforts to frustrate exploration off the islands by threatening the players and impeding the local oil service industry.–Robert Perkins in London
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