Desire's Falklands oil find turns into water

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The Independent Online

Desire Petroleum yesterday reined back on last week's oil strike in the waters off the Falkland Islands, sending the company's value plummeting by more than half.

The company's investors rushed for the exit after Desire admitted that additional "wireline" tests on the Rachel North well it said had struck oil last week found only traces of oil. The "mobile fluid" was only water.

Even after a tentative recovery in the afternoon, Desire's share price closed a catastrophic 49.5 per cent lower at 67.25p. Its stock had jumped from 106p to 133.25p at the end of last week after it announced the find.

Stephen Phipps, the chairman of Desire, admitted the test results were a major setback. "Having seen the highly encouraging results from the first logs, plus accompanying oil shows, it is extremely disappointing that the subsequent wireline logs and fluids sampling have dashed all the earlier promise of this being Desire's first oil discovery in the North Falkland Basin," he said. While investors baulked at the embarrassing collapse of Desire's optimism for the Rachel North well, the company stressed it had had no choice but to release the update last week, in line with stock market disclosure rules, and that the language was deliberately chosen to make clear the preliminary nature of the findings.

The violent gyrations of the stock – in both directions – were a market overreaction to the normal business of oil exploration, the company said. With an unusually large proportion of individual investors – in the region of 80 per cent – the stock is subject to greater swings than other oil prospectors with more long-term institutional investors, Desire added.

The company also emphasised that there was still hope for the overall Falklands drilling campaign. Despite US Geological Survey estimates that the waters around the Falklands hold up to four billion barrels of oil, the only discovery so far is Rockhopper's strike at its Sea Lion prospect earlier this year. Sea Lion reignited both the industry's expectations for the region, and political rumblings between Britain and Argentina over who owns the islands.

And while Rachel North itself may be barren, the well's sands show that oil has passed through them – it is just a question of establishing where it has collected, according to Desire.

"The presence of hydrocarbons and good reservoir development have been identified in a number of the Rachel fan sands and we therefore continue to believe in the prospectivity of the East Flank Play fairway for future oil discoveries," Mr Phipps said.

Rachel North will now be plugged and abandoned, and Desire will move on to drilling the next well in its schedule, at Dawn/Jacinta, in a different prospect on the southern margin of the basin. There are plans for at least one more well after Dawn/Jacinta and the company confirmed yesterday that it had £75m in cash, enough for both wells and the necessary seismic scans.

David Farrell, an oil analyst at Evolution Securities, said the outcome at Rachel North was "exceptionally unfortunate" for Desire but had little immediate impact on the credibility of the Falklands as a putative oil province. "In 99 cases out of 100 the indications of the preliminary tests are validated, but this was the one in 100 where that didn't happen," Mr Farrell added. "The stock market is looking for instant gratification when it comes to drilling oil wells but the geologists will see this as a learning experience."

Alchemy in reverse?

"Preliminary data indicate this well is an oil discovery. Desire now intends to complete the wirelineprogramme to obtain more information to assess the significance of this discovery." Statement, 2 December

"Preliminary results indicated ... a 349m interval of sands with hydrocarbons. However sampling of the sand has shown that the hydrocarbons are residual and that the mobile fluid is water." Statement, 6 December