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The future of oil on the Falkland Islands

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Enrique Marcarian/Reuters/File

(Read caption) The sun sets in Stanley, Falklands Islands. The renewed sovereignty frenzy over the Falkland Islands emerged in 2011 in the wake of a discovery of 1.4 billion barrels of oil in the North Falkland Basin, Alic writes.

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Next month will determine the eventual fate of the Falkland Islands—and the 1.4 billion barrels of oil so far discovered there—when a referendum on self-determination is held.

In the run-up to that referendum, Argentina has stepped up the rhetoric, most recently with the Argentine Foreign Minister claiming that within 20 years, the Falkland Islands will be entirely under Argentina’s control.

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UK Foreign Secretary William Hague has responded by calling this a counterproductive “fantasy”. Hague says the government of Argentine President Cristina Fernandez de Kirchner has refused diplomatic dialogue and chosen instead a path of “bullying”.

“We shall never negotiate about the sovereignty of the islands, unless the islanders wish it,” Hague said. 

For now, the Falklands are a British Overseas Territory, but Argentina claims sovereignty over the islands, which it calls Las Malvinas. It’s a rather long and complicated history that has seen the islands change hands numerous times, but first inhabited by the French back in 1764. In 1982, Britain and Argentina fought a 10-week war over the islands. One can argue all day about whom the islands really belong to, but that will get us nowhere.

What’s relevant is what today’s inhabitants want. (Related article: The Real Reason Behind Argentina's Renewed Interest in the Falkland Islands)

The solution—which is not to Argentina’s liking—is to hold a referendum and let the inhabitants of the islands engage in a bit of self-determination. They will choose to remain a British Overseas Territory.

More than anything, Argentina is using the islands as a way to raise national sentiments at a time when things are not so great at home on the economic front.   

And that’s where the oil comes in. The renewed sovereignty frenzy over the Falkland Islands emerged in 2011 in the wake of a discovery of 1.4 billion barrels of oil in the North Falkland Basin, in Rockhopper Exploration’s (RKH: LN) Sea Lion field. Overnight, the Falklands was billed as the next big energy hub, as well as a staging ground for a territorial war.

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Argentina has threatened legal action against energy firms working in the Falkland Islands who are “stealing the natural resources of Argentina”.

So far, Argentina’s attempts to derail oil and gas exploration have not been successful. Exploration continues unabated, and the oil companies operating there have not even blinked. Indeed, Rockhopper Exploration has signed a $1 billion partnership deal with Premier Oil (PMO.L) to pump from Sea Lion.

Territorial bickering aside, however, the Falkland Islands have been rather disappointing to the industry since the 2011 find. Since then, a much-anticipated four-well drilling frenzy in the South Falkland Basin has failed to turn up any more oil—only gas and condensate.  (Related article: Business as Usual for Big Oil Despite Falkland Tensions)

Hedging their bets that the South Falkland Basin would be as lucrative as Rockhopper’s in the north, companies like Falkland Oil and Gas (FOGL) and Borders & Southern drilled a series of four wells only to find zero commercial oil. Borders’ Darwin well did hit an estimated 190 million barrels of condensate, which has just been declared commercially viable, but its second well, Stebbing, was eventually plugged and abandoned. Both of FOGL’s wells found gas, but the results are still being evaluated.

As for Argentina, for now this is all about rhetoric that is meant to be digested at home to score some much-needed political points and to distract the population from the country’s economic woes. It is not likely that Argentina is planning to take this to a level that would mean conflict. The referendum next month will force Argentina to respond with even stronger rhetoric and more vivid threats, but barring a much worse economic situation at home that threatens the ruling power base, this should not go beyond the rhetoric.

Rockhopper and Premium will keep pumping, and FOGL and Borders will continue exploratory drilling until they hit pay oil.

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