Protracted economic crises always challenge the forbearance of governments and militaries across the world when it comes to border disputes, be they maritime or onshore. The case of the Falkland Islands (called Islas Malvinas in Argentina) has been one of those odd situations when the purported hydrocarbon bounty of the place might be a ridiculous hoax that was used to hype up the political dimension of the conflict or alternatively it might be a harbinger of a yet-untapped oil and gas bonanza. In a fairly similar fashion to Brasil’s pre-salt deposits, hydrocarbons in and around the Falklands Islands can be directly linked to the breakup of the Gondwana supercontinent – the Falkland microplate drifted off to the south of what is now South America, creating several rift basins along the way. The first prospecting surveys north of the Falklands have started around 1998 when a total of six wells was drilled – despite the relatively high success rate (5 wildcats out of 6 encountered oil plays), none was deemed commercial enough. The 2nd round of appraisal works, now already based on 3D seismic data, took place between 2010 and 2012 and brought about several discoveries (Casper, Beverley etc.), most notably the Sea Lion field that has gradually become the islanders’ (and Britain’s) biggest hope in nudging all the surveying works towards commercialization. The shareholding split of the project is still not finalized after a decade of speculation about who would be brave enough to join – the Israeli Navitas Petroleum is set to buy 30% of the asset at some point next year, thus creating the following ownership structure: Premier Oil (operatorship, 40%), Rockhopper Exploration (30%) and Navitas (30%).
By and large, there are 3 main challenges standing in the way of developing Sea Lion – its middle-of-nowhere location, harsh climatic conditions and lack of infrastructure around (i.e. the necessity to create it from scratch). Whilst oilmen can do nothing with the location, they can certainly assess what should be done to create a sustainable basis for production regardless of season. The most likely option will be a FPSO connected to the respective fields by subsea tie-ins. Since neither of the steakholding companies owns any refining assets that could easily digest the volumes if needed, Sea Lion cargoes would ceteris paribus most probably be marketed via integrated majors – although most of them do happen to have assets in Argentina hence the easiest choice would be to clinch a deal with an international tradinghouse.
Sea Lion’s final investment decision was deferred in Q2 2020 (until prices and markets recover), therefore it is difficult to assess when Phase 1 production would start. According to initial plans, Phase 01 should see 29 wells drilled with a view to attain an output plateau of 85kbpd. Phase 1 will target 250 MMbbl of oil reserves, whilst Phase 2 aims to commercialize another 280 MMbbl so it would be reasonable to expect that the second phase’s production aims will hover around 90-100kbpd. Once commissioned, Sea Lion will become a rather peculiar South American grade as its density (29.2 API) puts it into the category of medium crudes, all the while its Sulphur content and TAN number is really low (0.2%). Its waxy nature and high pour point (30 degrees Celsius) might be a headscratcher for some refiners though. There might a fourth complication factor, one that is still impossible to forecast considering the very little amount of information we currently possess about the Falklands’ prospects. The question is whether the Falklands would not lean towards the gaseous side – in 2012 when a company called Borders&Southern Petroleum reportedly discovered 210 MMboe of gas and condensate the news has saddened many advocates of Falklands drilling as natural gas would be much more difficult to market and export, especially considering Argentina’s pugnacious stance on the issue.
Dating back to the Kirchner era, Buenos Aires has set out to sanction any entity active in the Falklands’ offshore. Having modified the Hydrocarbons Law in late 2013, the Kirchner Administration has established penitentiary punishments of up 15 years if the sanctioned entity was found to conduct any sort of illegal exploration, extraction, transportation or storage activities without the authorization of Argentinian authorities. Increasing the pressure on anyone willing to prioritize the Falklands over the massive Argentinian market, Buenos Aires has maintained the threat of sanctioning banks that provide financing for companies active in the Falklands and has repeatedly claimed that it would ban vessels that have been utilized there in one way or another from docking into Argentinian ports.
The sanctions regime set up by the Argentinian government has up to now failed to target anyone directly as all the entities active in the Falklands do not have any exposure in Argentina. Nevertheless, from the viewpoint of Buenos Aires they serve a very useful end in that they render exploration even more expensive as the oil companies cannot use the Argentinian market for the provision of necessary drilling rigs, equipment and staff. It is very unlikely that Argentina itself would ever need to buy oil from the Malvinas, luckily for Buenos Aires its own shale gale will provide substantial volumes even if demand grows exponentially. Hence, Sea Lion is up for a tough test – its reserves have been swelling as the operators know more and more about its quality source rock, however its commissioning date (initially assumed to take place in 2017) keeps on being pushed back, not least because of its geopolitical inconvenience.
By Viktor Katona for Oilprice.com
More Top Reads From Oilprice.com:
- Mexico Is Quietly Pushing Out Foreign Oil Investors
- Oil Jumps On Crude Inventory Draw
- Goldman Turns Bullish On Oil: Sees $65 Brent In 2021