A recent piece from the Financial Times points to the fact that despite the remoteness of the Falkland Islands, the fall of international oil prices and the ongoing conflict with Argentina, this has not impeded small oil and gas companies from going ahead with exploration, and hopefully before 2020 production, in the Islands waters.
In effect a new round of drilling is currently taking place in Falklands waters, six wells at a total cost of 400 million dollars, with most of the funds coming from Premier Oil (UK) and Noble Energy (US), and among smaller partners Rockhopper Exploration and Falkland Oil & Gas ltd, writes Michael Kavanagh.
The article states that oil was first discovered in Falklands' waters in 2010, at Sea Lion prospect, to the north of the Islands. Rockhopper did the discovery, but the potential was not large enough to attract the big oil companies, but fiscal income from the exploitation could certainly make a difference for the scarce Islands' population.
The original idea was for production to begin in 2017, but remoteness, delays in obtaining financial support plus the collapse of oil prices have delayed the goal.
However Rockhopper CEO, Sam Moody insists that a smaller scale plan at Sea Lion with an initial outlay of 1.8bn dollars or less, could guarantee the beginning of production before 2020.
Nevertheless Moody is convinced that Sea Lion will be developed no matter the success or non success of the current round of drilling in Falklands' waters. We're talking of nearly 400 million barrels of recoverable crude. I don't recall the last time such a discovery took place in the British North Sea.
However the decision rests on Premier Oil, which trades at the FTSE 250, and purchased a majority stake at Sea Lion and is the operator since 2012. Last January, according to FT, Premier CEO Tony Durrant said that the company can only support the investment if Brent crude prices significantly and effectively stabilize above 50 dollars a barrel.
This also involves taking into account a balance between future oil prices and fiscal conditions for the companies operating in the Falklands. The local government expects to receive 9% in royalties from oil extraction plus a 26% tax on companies profits.
Falklands' Mineral Resources director Stephen Luxton insists it is a good deal and one of the most generous conditions in the world. It's an important principle to keep fiscal stability since the companies are planning 15 to 25 year projects and thus companies need a good return to work here in the Islands, a remote area.
Finally the FT article points out that Luxton does not want to speculate as to how much money Sea Lion development would mean for the Islands economy and government coffers, but it will make a big difference.
The Falklands have less than 3.000 population, with an annual GDP of 100 million pounds which works out at 30.000 pounds per capita. Traditionally the Islands lived off wool and sheep farming, but since the 1982 conflict fisheries and particularly squid have made a huge difference. However this could further change if Sea Lion effectively advances and is developed. In the first stage of development extraction would be 60.000bpd and the Falklands government fiscal income from oil could reach 2.5bn dollars in 15 years.