Introduction
Argentina has started to make a name for itself in the oil and gas world due to the vast reserves located in the Vaca Muerta shale region. If successfully developed, Argentina could become the first major shale producer outside of North America.
But just off the coast of Argentina in the Atlantic Ocean is another budding oil and gas region. Although it is not Argentine territory – this is a very sore subject – this area could also be another source of new oil and gas production. The Falklands (or as Argentina calls them, Las Malvinas) are a group of islands that have been under British rule since the 19th century. Argentina and the United Kingdom fought a short but bloody war in the early 1980’s in the waning days of the Argentine dictatorship.
After the war a standoff ensued. Argentina demanded the U.K. turn over the islands, but the U.K. has stood firm. Little movement took place over the past few decades. But Argentina is once again incensed about British control over the islands so near to its shores. The flare up in tensions in recent years has occurred because there is solid evidence that an oil bonanza lies just off of the islands – to the north, east, and south. Argentina has done its best to scare away investment, barring companies from the Vaca Muerta if they also operate in the Falklands. With the oil majors staying away, deciding they are better off staying on Argentina’s good side, only smaller companies…
Introduction
Argentina has started to make a name for itself in the oil and gas world due to the vast reserves located in the Vaca Muerta shale region. If successfully developed, Argentina could become the first major shale producer outside of North America.
But just off the coast of Argentina in the Atlantic Ocean is another budding oil and gas region. Although it is not Argentine territory – this is a very sore subject – this area could also be another source of new oil and gas production. The Falklands (or as Argentina calls them, Las Malvinas) are a group of islands that have been under British rule since the 19th century. Argentina and the United Kingdom fought a short but bloody war in the early 1980’s in the waning days of the Argentine dictatorship.
After the war a standoff ensued. Argentina demanded the U.K. turn over the islands, but the U.K. has stood firm. Little movement took place over the past few decades. But Argentina is once again incensed about British control over the islands so near to its shores. The flare up in tensions in recent years has occurred because there is solid evidence that an oil bonanza lies just off of the islands – to the north, east, and south. Argentina has done its best to scare away investment, barring companies from the Vaca Muerta if they also operate in the Falklands. With the oil majors staying away, deciding they are better off staying on Argentina’s good side, only smaller companies are exploring around the islands.

A Playground for Smaller Companies
Let’s take a closer look at some of the players and some of the prospective tracts of oil and gas near the Falklands.
Premier Oil (LON: PMO) has one of the stronger positions in the region. It farmed-in on the Sea Lion field to the north of the Falklands, a license owned by Rockhopper Exploration (LON: RKH). The Sea Lion has garnered quite a bit of attention. But Premier dialed back drilling plans after oil prices sank. Premier now plans on spending no more than $2 billion to develop a smaller section of the field by drilling fewer wells. Once online, Premier forecasts that its investment will yield 160 million barrels of oil over the course of 15 years, providing a plateau rate of 50,000 to 60,000 barrels per day. Premier drilled the Zebedee well in the Sea Lion prospect, and they discovered a 79-foot oil column. Premier also spud the Isobel Deep well on April 8, and test results are forthcoming, perhaps by the end of the month. Future drilling will depend on the results.

Noble Energy (NYSE: NBL) is a larger driller in the Falklands, and it has more of a global reach. Noble is best known for its major gas discoveries in the Eastern Mediterranean where it is developing natural gas for sale in Israel, Jordan, and Egypt. But Noble is also the lead on a few projects near the Falklands.
Noble has the rights to 10 million gross acres that stretch across the South Basin (which consists of three sub-basins southeast of the Falkland Islands, including the Volunteer Sub-Basin, the Fitzroy Sub-Basin, and the Southern Sub-Basin). The one project to watch is the Humpback prospect, one of the most exciting projects lined up in the Fitzroy Sub-Basin. Humpback may hold around 510 million barrels of oil (unrisked). The results from that spud will inform what the companies do next. If they prove to be promising, the group may drill nearby. The Stingray play, for example, located in the vicinity of Humpback, could hold 266 million barrels, but will not come next unless Noble feels confident about the resources. Noble is the lead on the Humpback project, with a 35% working interest. Falklands Oil and Gas Limited (LON: FOGL) has a 52.5% stake and Edison International (NYSE: EIX), a 12.5% stake. They expect to spud in May 2015.
As such, success in the near term hinges quite a bit on how the Humpback turns out. It will provide some clues about the geology and how prolific the Fitzroy will ultimately be. If the results are positive, expect these companies to invest more money in the region. If the results, however, are not good, they could scale back their drilling plans.

Falkland Oil and Gas (FOGL), a smaller company, is the only pure play on the Falklands. Despite its small size, it is the largest license holder for the area, with acreage in the North, South, and East basins. FOGL does not have a huge financial base to work with, nor does it have a massive drilling presence, so its strategy has been to lock up promising acreage and farm out operations to larger players (mentioned above) including Noble Energy, Edison International, Premier Oil, and Rockhopper Exploration. FOGL is targeting 1.4 billion barrels of unrisked prospective resources for its 2015 drilling program. It has a hand in the Sea Lion field, as well as the Humpback.

FOGL has also drilled three wells on its own in the South and East Basins, in which it has found more natural gas than oil. Several of the wells had significant gas resources, but the reservoir quality was poor. For the next steps, FOGL is looking to some of its partners that are farming in. FOGL has $100 million cash on hand without any debt.
Despite the excitement surrounding Humpback, Noble, Edison, and FOGL have decided to defer a second well that they had planned on drilling in the Southern basin. Instead they are reworking their drilling program to take a more cautious approach, and may drill another well in the North Falklands Basin. FOGL published a revised drilling schedule on April 13, which can be seen below:

After the top three, it could be the sixth one on the list that Noble Energy appears to be confident about. Noble announced on April 13 that it acquired a 75% working interest from Argos Resources Limited (LON: ARG) on a large tract in the North Basin. Edison International got the remaining 25%. Argos will get a 5% royalty from any oil and gas produced. Noble is targeting the Rhea, which it may drill as soon as the third quarter of this year. Rhea could hold 250 million barrels.
A Far Away Place
The Falklands still present a lot of uncertainty and risk, despite the excitement surrounding the potential bounty to be had. The islands are far away from anything, which makes it difficult to get drilling equipment in place. Argentina won’t help, owing to the political standoff, so kit must be sent from overseas. Moreover, the islands deep-waters lack ports and other infrastructure, which will slow any scaling up of operations. And as with all oil and gas projects worldwide, low oil prices are forcing corporate executives to reevaluate their priorities. All of that means that companies hoping to drill in the Falklands will take it slow.
Conclusion
Oil and gas off the coast of the Falklands has been sought after for several years now. But drilling is only starting in earnest this year. There is still quite a bit of political risk – Argentina will not let the issue over sovereignty drop so easily. For now, that could work to the favor of some of the companies involved, if they are willing to take on risk. Without bigger competition from the oil majors, they can scoop up acreage for relatively cheap. For investors looking for some exposure to the Falklands but with lower risk, Noble Energy and Premier Oil might be the companies to look at, as they are larger, a bit more diversified, and have taken the lead on several projects. For the investor with more of a risk appetite looking for a pure play with quite a bit of volatility, check out Falkland Oil and Gas.
There have been years of hype, by 2015 may finally bring some more clarity on the future of the Falklands as an oil and gas producing region.