The latest salvo from an increasingly aggressive Argentina threatens to unseat
the multi-billion dollar South Atlantic industry just as it begins to gain
traction.
Making money from the Falklands natural resource base is nothing new.
For decades, the islands’ economy has been based on farming and fishing, with
the Central Intelligence Agency’s World Factbook noting that in 1996, 95pc
of the island’s $165m (£103m) gross domestic product came from agriculture
— mainly shepherding and fishing — with the rest coming from industry and
services.
In the decade-and-a-half since that snapshot, however, much has changed. Much
of that development was sparked by the 1987 decision to sell fishing
licences to foreign trawlers which boosted the island’s economy by
approximately $40m a year.
In addition, tourism, particularly eco-tourism, has grown rapidly, boosting
the at times isolated economy yet further. But it is what lies off the
islands – indeed what lies beneath the islands – where the real value is
hidden.
In 1993, the British Geological Survey announced a 200 mile oil exploration
zone around the islands, with early surveys suggesting reserves holding
enough oil to produce in the region of 500,000 barrels of oil a day.
Two years later, the UK and Argentine governments reached an agreement in
which the UK would receive 66.6pc of any earnings on oil and gas discovered
in waters to the east of the Falklands, with Argentina receiving the
remaining third.
As a result, a small number of exploration companies emerged, including
Borders Southern Petroleum. The firm was floated on the London Stock
Exchange’s Aim market in May 2005 by Harry Dobson, the Scottish mining
tycoon.
It was valued at £25.5m after raising £10m from City investors on the back of
licences for 20,000 sq km of exploration in Falkland waters.
Two years after that listing however, the Argentine government ripped up the
1995 agreement, with then foreign minister, Jorge Taiana, saying the UK had
failed to respect the original terms.
The tensions between the UK and Argentina have worsened considerably since
February 2010, when Desire Petroleum, also listed in London, hired a rig to
commence the first drilling in Falkland waters since Shell ended exploration
in 1998 amid falling oil prices.
Today, the five exploration companies which the Argentine government appears
most concerned with are worth £1.6bn collectively.
Despite the clear conflict, a recent research note by independent research
house Edison Investment Research claimed that the Falklands stood to benefit
from a $176bn tax windfall as the result of oil and gas drilling.
The report, co-authored by Ian McLelland, said that of the four major
prospects underway, the largest, Loligo, owned by Falkland Oil and Gas,
potentially holds more than 4.7bn barrels of oil.
The most developed, Sea Lion, owned by Rockhopper Exploration, is forecast to
produce 448m barrels over the 20 years from pumping, which is due to begin
in 2016.
Sea Lion is approaching the size of the single largest field – Buzzard –
discovered in the North Sea this century.
“With current tax and fishing incomes in the region of $40m, the islands look
set to be transformed by the oil industry,” wrote Mr McLelland.
It is that fact that the Argentinian leader, Cristina Fernandez de Kirchner,
has focused on. She has criticised the UK for “the plundering of our natural
resources, our oil”.
It is now widening the legal threat to those banks advising the companies, and
even those writing research analysis on them.
Legal experts spoken to by The Sunday Telegraph suggest that although the
wording of the new legal warning is stark, it does not state exactly what
damages or claim is being made, or indeed where any action would be fought.
One lawyer with experience in international trade disputes said that the
Argentine government seems intent on scaring off investors and damaging
the exploration companies’ ability to raise finance. “For the research
companies and banks, there’s no valid claim against them whatsoever,” said
the lawyer who asked not to be named.
“For the oil companies themselves, it’s more circumspect,” said the lawyer,
noting no letters have been issued to them. “They are pawns in the middle of
two big states, and they could end up having their assets taken off them.”