Explorers fail to strike oil in test sites off Falklands

Desire Petroleum's shares slump after disappointing results from drilling tests

Fears about the lack of significant oil finds to the north of the Falkland Islands escalated after two companies came up almost empty-handed in the first attempt for 12 years to drill in the politically sensitive region.

Desire Petroleum's market value halved yesterday after it announced to the markets that its Liz 14/19-1 well on the North Falkland basin had come up short of expectations for oil, with reports that the reserves it found would not be commercially viable.

The group said it had found indications of hydrocarbons while drilling at 2,550 metres. Tests showed that "oil may be present in thin intervals but that reservoir quality is poor".

The announcement sent its shares plunging 50 per cent to close at 50p on London's growth market yesterday.

There are still some hopes of a significant gas find, after evidence was found below 3,400 metres. The results will be analysed possibly by Wednesday. "It will not be possible to determine the significance of the hydrocarbons encountered and whether the well will need to be drilled deeper, suspended for testing or plugged and abandoned," the statement said.

Shares in Rockhopper Exploration, which has a 7.5 per cent working interest in Liz, fell over 20 per cent, but recovered, closing down 8.5p to 45p. Rockhopper also has a minority farm-in deal with Desire in two other sites, named Ann and Ninky.

David Hart, oil and gas analyst at Westhouse Securities, said expectations had run high for the drilling programme: "While clearly not the commercial success the companies were hoping for, it is still very early to declare the drilling campaign a failure."

He continued: "In time there will be some read-across to the other sites in the North basin, but we don't have enough details from this drill yet. This increases the risk, in geological terms, of the chance of success."

Rockhopper is hoping for better news from its Sea Lion well. As soon as the Ocean Guardian drilling rig is finished at Liz it will move to the site 50 kilometres west on the North Falkland basin, the company said. One source close to the group said there was "no read-across from the Liz prospect to Sea Lion. It is expected to be a much oilier prospect."

The rig will then move to the south of the islands, to start work on a Falklands Oil & Gas (Fogl) prospect.

A spokesman for Fogl said the company was "exploring to the south and east of the island targeting a different geological basin. Desire's drill results are no indication of the likely outcome of Fogl's drill programme."

Mr Hart added: "There was a lot of expectation built into these programmes, but there will be even more."

There is an extensive drilling programme planned for the area with up to 10 wells targeted this year. "Exploration in new frontiers, such as the North Falkland basin, often takes multiple wells before success is achieved," Mr Hart said.

The UK companies' plan to launch widespread drilling in the region has reignited political tensions between Britain and Argentina. The countries went to war over the islands in 1982.

The Argentine President, Christina Fernandez, called for support from Latin American and Caribbean leaders. Venezuela's President, Hugo Chavez, was the most vocal, calling on the Queen to hand back the territory, saying: "That sea and that land belongs to Argentina and Latin America."

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