Falklands: the final frontier

The Falklands Conflict — Britain and Argentina, of course, never actually declared war on each other though they still managed to kill more than 900 servicemen between them — has among historians of the Left been regarded as a cynical jingoistic ploy by Margaret Thatcher: the Prime Minister happily participating in a war to fire up her wilting ratings to the point she won a second General Election the next year.

But three decades on, Britain's last solo, unallied armed conflict, over the sovereignty of some rocky outcrops in the stormy South Atlantic might just begin to make some sense.

And, as is so often the case, it has got a lot to do with oil.

Fevered talk in private investor chatrooms is that the British-owned Falklands will prove to be one of the last great frontier oil provinces of the world, a region so rich in hydrocarbons that it might eclipse the UK's North Sea oil and gas bonanza.

Oil was first found off the coast of the Falklands by Shell in 1998 — a suitably long period of time to start drilling after the humiliation of the Argentinians.

Six wells were drilled in the seabed of the North Basin off the Falklands. Five had oil shows and gas was found too. But these were the dog days of $10-a-barrel oil, the wells were not classified as a commercial discovery, and Shell sailed away. Yet the drillbit had found reservoirs and in the right type of rock. And as we enter the second decade of the 21st century — with oil reckoned to be staying at $80 a barrel for the foreseeable future — serious drilling is about to start again.

And the money is pouring in. In the past few weeks, four London-listed exploration minnows have raised more than £250 million from City investors keen to be on the first wagon train to one of the last Klondikes of the earth's hydrocarbon-producing epoch.

The Falklands' North Basin is reckoned to be a relatively benign drilling region, akin to the North Sea with water depths of no more than 450 metres and potential reserves — and you have to remember here it is oilmen talking — of billions of barrels of oil and trillions of cubic feet of gas. The finds that are being talking about could be classified with the North Sea giants such as Ormen Lange and the Forties field. It is where Rockhopper Exploration and Desire Petroleum, with privately owned partner Arcadia, are operating.

There is a second separate province the South Basin, to the east and south-east of the island capital Port Stanley where the as yet untested rewards could be far higher and in the league of the sort of big finds being discovered in boomtime offshore Brazil. But the risks are far greater too, much deeper water at 1400 metres and the need for wells more than two miles deep — and in the sort of weather which might make the inhospitable North Atlantic west of the Shetlands seem attractive.

The South Basin is where Borders & Southern Petroleum and Falklands Oil & Gas (FOGL) are prospecting, the latter in a joint venture with global mining giant BHP Billiton.

After years of speculation and expectation, a drilling rig, the Ocean Guardian, has finally been commissioned by Desire, and it set sail from the Cromarty Firth last week. With a two-month journey ahead, it is expected to be ready for business in February.

Oil analyst Richard Rose at Oriel Securities warns that all the Falklands' prospects may be drill-ready but the provinces remain high risk and that success for Desire or Rockhopper does not mean FOGL or Border have a good chance of success.

"The South Falklands Basin remains a virgin basin but the potential upside is significant with prospect sizes an order of magnitude higher than in the North basin," he said. "However, we stress that the drilling results in the North will have no impact on the potential in the South, given they are two geologically independent basins.

"The Falkland companies offer investors exposure to frontier exploration and in the event of success could yield returns measured in multiples of current share prices. However, that needs to be balanced with the significant probability that the proposed drilling campaigns will not yield any commercial discoveries."

A share-trading bubble may begin in these four Aim stocks in the coming months as City whispers go into overtime. That the stocks are operating in the South Sea only lends to the irony.