Falkland Islands Oil: Lots of False Starts and Dry Holes

David Fessler
by David Fessler, Energy & Infrastructure Strategist, The Oxford Club

Falkland Islands Oil: Lots of False Starts and Dry Holes

by David Fessler, Investment U Senior Analyst

Thursday, July 7, 2011

The Falklands population numbers a little more than 3,000, and most are engaged in sheep farming, fishing and tourism. But that's all about to change. The inhabitants of this quaint little collection of islands could become the South Atlantic's newest oil barons.

Since the late 1970's, seismic surveys have indicated the area was a viable candidate for further exploration. Ever since, speculation has run rampant that the island waters could contain large oil and gas reserves. Estimates have ranged as high as 60 billion barrels, putting the Falklands Basin on par with the North Sea

Drilling off the Falklands has been going on for over two decades.

  • Back in 1988, a consortium between Shell and ENI found traces of oil, but due to the low price at the time, the well was plugged and abandoned.

  • In early 2010, a British company, Desire Petroleum plc (PINK: DSPMF) drilled six exploratory wells. Results were disappointing in all of them. Some of the wells indicated the presence of oil, but not in any commercially viable quantities. DP's stock plummeted as a result.

  • Falkland Oil And Gas (PINK FLKOF), with the backing from BHP Billiton (NYSE: BHP) also came up dry after its 2010 drilling program failed to produce any oil. It plans on additional drilling once a new rig is contracted.

  • In late 2010, Rockhopper Exploration plc (PINK: RCKHF), a U.K.-based exploration firm, announced it had discovered oil. This past April initial tests confirmed its Sea Lion prospect reservoir contained at least 155 million barrels of recoverable oil. A second well was drilled nearby and it too showed the presence of commercial quantities of oil. Further testing confirmed flow rates of as much as 5,508 barrels per day.

Additional appraisal wells are planned over the coming months to further delineate the size of the Sea Lion prospect. The next well to be drilled will be 14 kilometers from the last one. Rockhopper's stock has doubled since the news of the most recent discovery.

So What Should Investors Do?

Depending in large part on your appetite for risk, investors should realize that junior oil and gas exploration companies come and go. As you can see from the above examples, many of them never find anything, despite the latest seismic technology.

It can be an expensive lesson for shareholders to learn. You should NEVER invest in companies with any money that you aren't willing to part with permanently.

If you ultimately decide to take the risk and invest in a junior oil exploration company or a junior miner, you need to do a lot of homework. Sometimes the payoffs can be huge and sometimes not.

Good investing,

David Fessler

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