After occasionally dabbling with Falkland oil exploration stocks over the last 10 years with relatively little return and huge volatility ,news flow due in quarter 1 2010 means the region is starting to look an interesting speculative play with potentially signficant upside to the current share prices.
There are 4 AIM listed explorers in the U.K. which offer exposure to the opportunity - Desire Petroleum (DES), RockerHopper Exploration (RKH), Falkland Oil and Gas (FOGL) and Borders and Southern Petroleum (BOR).
There may be up to 60 billion barrels of oil lying beneath the Falkland Islands in the Southern Atlantic. If the potential of the area is fulfilled it will be comparable in size to the world’s largest oil-field, Ghawar in Saudi Arabia, which is believed to contain around 80 billion barrels. The Falklands' North Basin is a relatively benign drilling region, similar to the North Sea with water depths of no more than 450 metres. It is where Rockhopper Exploration and Desire Petroleum, with privately owned partner Arcadia, are operating.The Southern Basin is where Borders & Southern Petroleum and Falklands Oil & Gas (FOGL) have licences, the latter in a joint venture with global mining giant BHP Billiton.
The North Falklands basin is distinctly different from the Southern Basin. The North is an in land lake in a failed rift system.. As the basin starts to pull a part it gets stretched and the rock thins allowing sediment to be deposited in the gap. The gap being thousands of meters. The lake was probably fed by multiple rivers which carry sediment and deposit it in the lake (basin) in deltaic systems. This is similar to the geology of the Gulf of Mexico delta, Nile delta, offshore Nigeria.
In 1998, Shell, Amerada Hess and Lasmo drilled 6 wells in the Falklands North Basin, five of which had hydrocarbon shows (both oil and gas) and one was dry. In 1999, the Oil majors relinquished their licences as given the geographical location extraction was uneconomic at the prevailing oil price of around $10 . The minors then stepped in. Desire Petroleum was founded in 1996 (named after the sailing ship Desire which made the first confirmed sighting of the Falkland Islands in 1592) and participated in the first round of drilling in the North Falkland Basin in 1998. Desire now operates 6 licences in the area, Tranches C, D, F, I, L and the recently awarded PL034. Over the last 5 years, Desire shares have moved in a range from less than 10p (2003) to 114.5p (20009) as interest in the area has followed movement in the oil price and news flow from the companies involved. In the last 12 months it has had a 52 week range of 40-114.5p.
Things have hotting up for Desire becasue the Ocean Guardian rig is currently being towed into the North Falkland Basin and will arrive in February after leaving the Cromarty Firth in Scotland in late November. In September, Desire agreed a deal with UK driller Diamond Offshore to contract the Ocean Guardian for a minimum four-well campaign. It has since agreed to sell-on two additional option wells to its partner in the region, Rockhopper Exploration.Falkland Oil and Gas, which is working in partnership with BHP Billiton, said it was in talks with Desire over using the Ocean Guardian rig as part of a third contractual slot. Over the minimum 80 day drilling campaign, Ocean Guardian could earn maximum total revenue of US$19.6 million with mobilisation and demobilisation fees estimated to be US$16 million.
In the past month £327million has been raised to explore for oil in the Falklands. On 10th September Desire announced that it was issuing new shares in a placing to institutions (£2 million before expenses) and an open offer (£20 million) at 70 pence per share.The total estimated net proceeds of the Placing and the Open Offer will enable Desire to drill at least two further wells in the planned drilling campaign and / or to have the flexibility to test any successful wells. Desire has signed heads of agreement, with Rockhopper for the take up of two of the six options available for additional drilling. At the end of November, Falklands Oil and Gas (FOGL) placed of 43.5 million new ordinary shares at a price of 115 pence per share to raise $50 million to fund its share of the planned drilling programme in the East Falklands Basin and help the company meet its working capital requirements through to the end of 2011.The company's joint venture with BHP Billiton is seeking a deepwater rig to drill the first ever exploration well in the basin and was in advanced discussions with Desire Petroleum over the Ocean Guardian rig. It is ontracted by Desire to drill a four-well programme and is expected to arrive in Falkland waters in February next year. The rig will be used to drill the Toroa prospect, which is estimated to have prospective reserves of 1.7 billion barrels and a range between 380 million barrels and 2.9 billion barrels.The total mobilisation and drilling costs couple with the modifications required for the rig to enable it to drill in this depth of water will cost the company a total £12 million. Other prospects in the area, lie at greater depths and are best suited for being drilled by a drillship or semi-submersible, with the JV currently looking to contract such a rig later in 2010 to complete its minimum work commitment of two wells and possibly drill other discretionary wells. The cost to FOGL for the use of a deepwater rig and the drilling programme is currently expected to be around £30 million.
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