Oil firms eye final frontier

Oil companies are lining up to make an assault on what could be Europe's last big offshore oil region - the eastern Atlantic halfway between the Shetland and Faroe Islands. Which country might get a tax bonanza depends, though, on the outcome of governmental talks that show no sign of nearing completion.

Interest in the region has rocketed since oil was found in the "west of Shetlands" area, at the north-west limit of UK territorial waters. Schiehallion and Foinaven, which are now being developed, are thought to contain reserves of around 600 million barrels of oil. Now, an oil executive said, "People are looking to the area beyond these fields as the next frontier region."

The exact limit of UK waters in this direction has never been settled. Foreign Office officials have held 20 meetings since 1990, first with the Danish government, then with the administration of the semi-autonomous Faroe Islands. Copenhagen has said the Faroes can keep any revenues it raises from oil, and the government there is now drawing up a tax regime. For its population of 45,000, oil revenue would soon transform the islands' economy.

Because the British and Far-oese officials are using different calculations, they have not been able to agree on where the median line should be. A disputed zone has been marked out (see map), and neither side will award licences to drill in this area until the matter is settled.

"Parties are very keen to get a negotiated settlement but there's still a gap," said Martin Heinesen, head of the Faroes Petroleum Administration. "London thinks it is entitled to a bit more than an arithmetical median line." If there is no agreement, he said, the dispute might have to go to the International court at The Hague.

Oil companies are frustrated at the slow progress. "No one wants to give up any acreage because they see fields so close to the line," a spokesman for one of the majors said. "But I wish they would resolve it soon."

Geologists believe the best prospects lie within the disputed zone. BP has already carried out three-dimensional surveys in it and a specialist contractor is now doing the same. They reckon the rock structure that has yielded oil west of the Shetlands continues into Faroese territory - but they cannot be sure as a vast area of basalt lies across the seabed.

Basalt, volcanic lava, is almost impervious to seismographic survey as it blocks the sound waves in the same way that lead blocks X-rays. The Faroes themselves are made of basalt, and a hole is being drilled on the south island to discover how thick it is. The hole, which has already failed to pierce the rock at 2,200 metres, will be extended down to 3,500 metres this summer. If they can measure the basalt layer, geologists will then be able to calculate its thickness as it runs south towards the median line.

Another experiment, involving two ships firing seismographic shots at the basalt at very shallow angles, will also attempt to discover whether there are oil-bearing strata below.

The Faroese plan to go ahead with their first oil licensing some time next year. "It would be very helpful if we could come to a solution before then," Mr Heinesen said. Oil companies also hope that the British will issue new licences for new blocks as soon as the dispute is settled.

Although the British taxpayer will benefit if oil is found within UK waters, Scotland's offshore industry should do well wherever it is located. The Faroes does not intend to build up a support infrastructure itself, so activity in the area would have to be serviced from Scotland.