The deal signed by Foreign Secretary Malcolm Rifkind and his Argentine counterpart Guido di Tella in New York paves the way for a joint Anglo- Argentine commission to supervise exploration and revenue-sharing in 18,000 sq km south-west of the islands.
The deal comes days before a licensing round for six blocks in the disputed waters in the South Atlantic. It begins in London on Tuesday before moving to Houston, Texas, next week. The Falkland Islands government has sent invitations to 100 international oil and gas companies to take part in the briefings, although Argentine companies will be limited to a 49 per cent stake in any one block.
British Gas is examining the legal and tax aspects of the declaration before weighing up the political risk of participating.
It already is an active gas distributor in Argentina through its 35 per cent stake in Metrogas, which serves 1.8 million people in Buenos Aires. Earlier this year, British Gas held talks with Yacimientos Petroliferos Fiscales (YPF), Argentina's largest oil company, about drilling for oil within the exclusion zone established after the 1982 war between Britain and Argentina.
The British government would not accept any Argentine attempt to impose charges on companies working in maritime areas off the Falklands. "There is no mechanism for Argentina to tax companies exploiting oil in our waters, no more than there is for the French to tax companies in the North Sea" said Andrew Gurr, chief executive of the Falkland islands government.
However, Argentina is free to impose a 3 per cent levy on companies whose operations are based on the mainland. The main support base for exploration in the south Atlantic will be in Argentina. It is still unclear whether Buenos Aires will charge levies on all companies operating in Falklands waters.
Argentina does not accept the validity of next week's licensing round. President Carlos Menem's government has threatened to expel from Argentina any company taking part in any unilateral British exploration effort. The deal signed in New York has been called a sell-out by opposition parties in Argentina. They say it throws the country's claim to sovereignty over the islands into doubt.
Estimates of how much oil lies off the Falklands vary. Any find is likely to be at great depths in hostile waters.