Rockhopper to spend $2bn developing Falklands oil prospects

Rockhopper Exploration, the Aim-listed oil group, announced plans to invest $2bn (£1.3m) to develop offshore petroleum production to the north of the Falkland Islands.

In a move that will transform the British-governed territory into a new oil province and could boost tensions with Argentina, Rockhopper said it expects to begin pumping oil from its previously announced Sea Lion discovery in 2016. Rockhopper, which recently increased to 350 million barrels its estimate of the volume of recoverable oil contained in the field, aims to pump 120,000 barrels a day by 2018.

Development prospects are complicated by the fact that Argentina still claims the islands, 30 years after it fought an unsuccessful war with Britain for their control.

Britain refused to enter talks about the future of the islands in June, while Argentina said last year that boats sailing from its ports to the Falklands would need a government permit, potentially obstructing the project.

Rockhopper had a shaky start when it began exploring the 3,800 sq km covering its four Falkland licences, but prospects have now improved. In an update to the market yesterday, Rockhopper said the fifth well in the Sea Lion complex "had found a high quality reservoir package and oil column". Keith Morris, an analyst at Evolution Securities, said: "Rockhopper seems to have a good handle on the reservoir distribution in the Sea Lion Discovery and the economics look compelling too."

Rockhopper has about $170m of cash, which gives it enough to pay for the two additional wells it plans to drill. But the group has not yet said how it plans to fund the $2bn costs associated with full-scale oil production.

Richard Rose, an analyst at Oriel Securities, suggested Rockhopper could look to partner with another oil company to fund production in a revenue-sharing agreement.

The so-called oil majors have traditionally been wary of drilling in the Falklands, arguing that it is too costly.

However, Rockhopper's improving prospects in the area, fuelled by yesterday's update, would increase the attractiveness to oil majors of forming a joint venture with Rockhopper.