Saber-rattling over oil exploration in the Falkland Islands may obscure an even bigger risk for investors hoping to exploit the UK archipelago's energy resources. Despite worrisome noises from Argentine President Cristina Fernandez that territorial rights around the islands aren't clear, hedge funds have been building stakes in companies exploring the Falklands waters. Argentina's claims are weak, as is the country's ability to use force. The real menace to investment looks like the cost of extraction.
The oil prospects have prompted Fernandez to revive Argentina's 1820 claim over the South Atlantic islands, known in Spanish as the Malvinas, which brought Britain and her country to war in the 1980s. Her foreign relations ministry warned the London and New York stock exchanges in March that five publicly-listed UK exploration companies operating in the region violate Argentine territorial waters and face sanctions.
Her administration, however, has no legitimate claim to the 60 billion barrels of oil reserves estimated to lie off the islands' shores. And Argentina lacks the financial and military might to muscle British companies out of the area. What's more, the newly nationalized YPF doesn't have the expertise to tap such resources even if it chose to ignore Falklands licenses and drill in the region.
Yet the market is taking Argentina's threats seriously. Borders & Southern Petroleum, one of those in the Fernandez administration's sights, has lost about two-thirds of its value this year. Shares of Rockhopper Exploration, which actually found oil around the Falklands, have nearly halved. Some investors aren't scared, though. Lansdowne Partners and Odey Asset Management are among those buying into the same group of companies.
Even if Fernandez can't follow through, the bets look uncertain for another reason. For example, Rockhopper's Sea Lion find may have nearly 250 million barrels of recoverable oil. But analysts at Liberum Capital reckon that its capex, as well as tax and debt payments, will consume nearly five years of cash flow of the field's new majority owner, Premier Oil. The cost of capital for those operating in the Falklands is higher than elsewhere - estimated by Liberum at 11 percent for Premier Oil, compared to as low as 9 percent for more conventional oil regions. The commercial success of Falklands finds also has been limited, and the resale value of successful discoveries is unproven.
So while it may be easy to dismiss Fernandez when it comes to oil in the Falklands, the same can't necessarily be said of the bottom line.
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Raul Gallegos is the Latin America financial columnist for Reuters Breakingviews. Raul has more than a decade of experience covering the region's business, finance and economics. His work has appeared in the Wall Street Journal, the LA Times and Institutional Investor. From 2004 through 2009, Raul was the Venezuela-based oil correspondent for Dow Jones Newswires, and a member of the OPEC coverage team in Vienna. He holds a master's degree in International Affairs from Columbia University. He was a 2010 Knight-Bagehot Fellow at the Columbia Business School (firstname.lastname@example.org). The opinions expressed by the author are his own. Petroleumworld does not necessarily share these views.
: This commentary was originally published by Reuters Breaking Views, (email@example.com) on Nov 02, 2012. Petroleumworld reprint this article in the interest of our readers.
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Petroleumworld News 11/15/2012
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