Falklands Dispute Sparks Concerns in Oil Market

By Adam Currie — Exclusive to Oil Investing News

An already fragile crude market was dealt another dramatic blow recently with news that Britain had accused Argentina of illegal attempts to intimidate Falkland islanders relating to oil exploration, in hopes of sparking talks centred on sovereignty.

Britain has responded by stating that it will defend the Falkland territory, adding that it will only negotiate sovereignty or oil rights in the unlikely event that the 3,000 islanders request that it do so.

The move came after Buenos Aires announced that it would take legal action against any companies involved in oil exploration off the disputed South Atlantic territory.

Timing of the dispute reads like a Hollywood script, with tensions between Britain and Argentina rising as the 30th anniversary of Argentina’s invasion of the Falklands approaches. The move resulted in the deployment of a British task force after a ten-week conflict killed 650 Argentinian and 255 British troops.

The Falkland Islands have been controlled by Britain since 1833, but are claimed by Argentina. In 1982, following Argentina’s invasion of the islands, the two-month Falklands War resulted in the withdrawal of Argentinian forces.

Royalties like no other

The self-governing British Overseas Territory passes its own laws, sets its own taxes, and will collect any oil royalties for its own treasury. Interestingly, citizens of the island will surpass Arab oil barons in per capita wealth if they receive even a fraction of the $10.5 billion in taxes and royalties some industry analysts predict will flow from the, until now, untapped oil field. Analysts estimate that reserves could bring in up to $167 billion in taxes and royalties in a best-case scenario.

The dispute between the Britain and Argentina has escalated in recent months following oil findings by British exploration firms. Attention to the Falkland Islands’s potential reserves was highlighted in 2010 when explorer Rockhopper Exploration (LSE:RKH) discovered the Sea Lion field north of the islands. The company discovered 350 million barrels of recoverable oil at the location, and plans to start pumping oil by 2016. It has been seeking a partner to invest in the $2 billion project.

Borders & Southern Petroleum (LSE:BOR) and Falkland Oil and Gas (LSE:FOGL) are also set to drill wells south of the islands later this year.

Crude analysts described the exploration as “high-risk, high-reward,” in that it costs companies $1.3 million a day to explore and drill with less than a 25 percent chance of success. However, it is believed that a big strike could prompt a rush to join what might be one of the world’s last remaining new sources of fossil fuels in an era of peak oil prices.

According to Edison Investment Research, a London-based analysis firm that published an optimistic “Falkland oils” report in February, the island’s southern basin could hold ten times more reserves than the Sea Lion field’s estimated 450 million barrels, with a potential payoff forecast at above $100 billion.

Foreign relations nightmare

Argentinian foreign minister Héctor Timerman added fuel to the fire by threatening legal action against firms drilling off the territory, claiming that “[t]he gas and oil that is found in the South Atlantic belongs to the Argentinian people.”

In response, the UK Foreign & Commonwealth Office has underlined that the move was a legitimate commercial venture.

In an interview with the BBC, a spokesperson for British Prime Minister David Cameron called the Argentinian move “regrettable,” while the foreign ministry underlined its view that the Falklands are entitled to develop oil resources without interference.

“From harassing Falklands shipping to threatening the islanders’ air links with Chile, Argentina’s efforts to intimidate the Falklands are illegal, unbecoming and wholly counter-productive,” a Foreign Office spokesperson commented.

Besides building into what many consider to be a foreign relations nightmare, Argentina’s threatened action could result in some of the world’s largest banks and accounting firms being at risk of asset seizures. According to analysts, the move could spell trouble for banks such as Barclays (NYSE:BCS), HSBC (NYSE:HBC), and Standard Chartered (LSE:STAN), which provide services to Falklands oil explorers.

“They (Argentina) certainly could try and bring claims against the companies in the Argentinian courts and they could also try and seize any assets that were actually in Argentina,” said Catherine Robert, a specialist in international arbitration and cross-border litigation at Hogan Lovells.

All of these groups “need to pay closest attention to what’s being said in Argentina and perhaps start talking to Argentinian lawyers,” Robert added.

Creating obstacles

In an interview with Reuters, Mark Jones, a Latin American specialist and chair of the department of political science at Rice University, stated that Argentina wants to attack the explorers, which also include Argos Resources (LSE:ARG) and Desire Petroleum (LSE:DES), where they are most vulnerable.

“They’re signalling that they’re going to do whatever it takes to put obstacles in the path towards developing the energy resources in the Falkland Islands,” he said.

Oil services providers are also deemed at risk, despite Argentina not being a recognized major for supply vessels, offshore drilling rigs, or other equipment being used in the Falklands.

From a regional perspective, Argentina has the ability to create further issues in an otherwise tense crude market as it has already garnered support from Brazil in its claims to the islands. If Brazil was to follow Argentina’s lead and ban oil companies that service the Falklands from operating in Brazil, waves could be sent through the market.

Brazil is emerging as one of the largest offshore oil production centers in the world, and has concerned analysts by responding to Argentinian requests, underlining that it might bar vessels supplying the Falklands oil industry from its ports.

Securities Disclosure: I, Adam Currie, hold no direct investment interest in any company mentioned in this article.