Rockhopper strikes oil north of Falkland Islands

Discovery is first chance of commercial oil field in much-hyped but politically sensitive Falklands region
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Rockhopper exploration has struck oil in the North Falkland Basin, catapulting the region up the oil industry's agenda and turning up the heat in the diplomatic row over sovereignty of the Falkland Islands.

It is too soon to gauge the size of the find but even the suggestion of a commercially viable oilfield in the south Atlantic will reignite decades of speculation about the area's potential.

The successful strike was made at Rockhopper's Sea Lion prospect, which lies 220km north of the British territory. Early testing has indicated a "net pay zone" of oil layers some 53m (174ft) deep. The thickest individual layer is a respectable 25m (82ft) and the average porosity, which is crucial for calculating how much oil the rock holds, is a decent 19 per cent.

"We are extremely excited by the results," said Samuel Moody, the managing director of Rockhopper. "Current indications are that we have made the first oil discovery in the North Falkland Basin."

The find sent Rockhopper's shares soaring by xx per cent to XXp yesterday. The next step is to complete a complex "wireline" analysis to establish further details. The key will be an estimate of the permeability of the rock, which governs how fast the oil can flow and whether the reservoir will be commercially viable.

"Sea Lion is potentially significant, but not more than potentially so at this stage," said Richard Rose, an analyst at Oriel Securities. "The volume of oil could be quite significant but we don't know yet if it will flow. That is the big question mark."

The oil and gas industry has long speculated about reserves near the Falkland Islands but results have been disappointing until now. The first drilling effort in 1998 came to nothing and the first well of the current schedule – drilled by Desire Petroleum last month – found oil only in "thin sands", which would be impossible to produce commercially.

The success at Sea Lion prospect may be uncertain at this stage but it has changed the game. Not only will it make nearby prospects a bigger priority for concession-holders (see below), but it will also turn up the heat in the rumbling diplomatic dispute between Britain and Argentina over the sovereignty of the Falklands.

The row flared again recently when Argentina moved to prevent oil exploration in the region. In February, the President, Cristina Kirchner, forced ships passing through Argentinian waters to obtain permits to do so.

The battle will intensify if there are commercially viable oil deposits at stake. But in practice there is little Argentina can do, short of direct military involvement. Banning oil companies from using Argentinian ports will raise the cost of developing wells but, with a little investment, the harbour at Port Stanley in the Falklands can be used instead. With crude at $90 per barrel, the cost would still make sense.

"It is just rhetoric coming out of Buenos Aires at the moment," Mr Rose added. "No doubt the rhetoric will increase on the back of this discovery but they can't do much to stop operations so long as the British Government stands firm."