Oil Success Could Herald Sea Change for Falklands, Lift UK Firms
With a new drilling campaign about to kick off in the Falkland Islands, a leading lawyer believes a major oil find could bring fresh business opportunities for the UK's oil and gas sector.
Gavin Farquhar said the arrival of the Ocean Guardian drilling rig, due to arrive in the South Atlantic fresh from the Cromarty Firth on Valentine's Day, could herald the beginning of a new love affair between the UK and the Falklands.
Farquhar, a partner in McGrigors' energy and infrastructure team, has been conducting business in Port Stanley since the late 1980s and his team recently provided legal advice to Byron McKay Port Services, the Falklands company running the supply base which will support the exploration campaign.
He said, "They may be situated some 8000 miles away from the UK but the Falkland Islands are generating a fair bit of excitement in the City of London as the drilling campaign draws close.
"The oil price is kicking around at about $70 a barrel but if oil is found it’s believed extraction could be viable as low as $25 a barrel. The Falkland Islands government has set corporation tax at 26% on profits plus a 9% royalty on production, making it one of the most favorable fiscal regimes in the world for exploration."
Desire Petroleum is first up to drill in the shallow water North Falkland Basin and Rockhopper Exploration is next in line with two drilling slots allocated. Falklands Oil and Gas, in association with BHP Billiton, has a third option on the Ocean Guardian for its shallow water acreage in the East (its license extends to the Southern Basin also), while Borders & Southern is expected to line up its own rig to explore its deep water acreage in the South Falklands basin.
The North Falklands Basin is not unchartered territory and in the 1990s six wells were drilled but the finds were deemed not commercially viable. Against a backdrop of a low oil price, interest from exploration companies soon waned.
Farquhar added, "Back in '98 the Southern Basins were left completely unexplored but 12 years down the line things have moved on and we have relatively steady oil price, technology has improved and there is a new found momentum to explore in the region.
"Since then, there has been a great deal of seismic work done which has given the explorers a lot more confidence about where to drill and how to drill. Another contributing factor which has bolstered this new drilling campaign is that rig rates have come down in recent times and it is apparent Desire has felt confident enough to contract a rig at a price they are comfortable with."
With well costs estimated to be in the region of $25-30 million in the north basin and $30-$35 million in the south, all four companies have successfully raised finance in the City to complete the first exploration drilling campaign.
So what might this all mean for the UK oil and gas sector if results point toward decent reserves which merit a full-on extraction phase?
"If it all comes good it will be some years before exploration ends and production starts but it’s safe to say a large number of Aberdeen based service companies have products, skills and experience which are easily transferrable to the South Atlantic. Many companies which have evolved as the UKCS has matured will be in a good position to expand their business in the South Atlantic region. There is of course the sheer logistics of getting back and forth to Stanley but the rewards may outweigh that particular obstacle."
Already AGR, who have been contracted by Desire to run the imminent drilling campaign, have Aberdeen personnel in-situ and other UK companies have deployed staff in support operations.
Farquhar said, "It's only a trickle at the moment but as knowledge of the province, its challenges and opportunities, filter back to Aberdeen, I am sure the Falklands will attract the interest of other oil and gas services firms who are responsive to new challenges and opportunities.
"As someone who has been travelling to and from Stanley on business since the late '80s, I share the cautious optimism of the islanders that the arrival of the Ocean Guardian could herald the start of a sea change for the Falklands economy. If the drilling campaign goes well the oil industry will open up the islands to an influx of investment and job creation."
- Gavin Farquhar is a partner in McGrigors' Energy & Infrastructure team. McGrigors is the only UK law firm to have a presence in the Falkland Islands.
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