Falkland Oil and Gas shares plunge after its Toroa well proves empty

About 120 kilometres south of Port Stanley, capital of the Falkland Islands, a geological survey ship has been prospecting for oil in the one of the most inhospitable regions in the world.

The crew are frequently forced to abandon their operations as the boat is battered by gale force winds and torrential rain.

Brutal weather can damage the high tech gadgetry beneath the deck that scours for signs of ‘black gold’ under the South Atlantic sea bed.

This is frontier oil territory where enterprising companies are searching for energy’s equivalent of the new el Dorado. But the price of failure is high. Today, a small British company, Falkland Oil and Gas, told investors that a three year quest to find oil in the Falkland southern basin had been a failure, despite expenditure of $70m (£46m).

Chief executive Tim Bushell said: “The Toroa well did not encounter any hydrocarbons and will now be plugged and abandoned.”

Reaction in the City was savage with FOG’s shares nearly halving to 105p. Not that Bushell is giving up. His company is searching for a new rig that can drill deeper than the one it has been using as he remains convinced the area contains significant deposits of oil and gas.

“We are certainly not throwing in the towel,” says a company spokesman. “Given that six wells were drilled in the North Sea before any oil was discovered, we shouldn’t be downcast.”

British company, Rockhopper hit the jackpot two months ago – using the same rig as FOG – when it struck oil further north of the Falklands and its shares rocketed by 150%.

Another UK firm, Desire will take on the rig shortly to once again scour the Falklands northern basin where traces of oil were found in 1988 by a consortium involving Shell and ENI. That project was abandoned because the low oil price at the time made further development uneconomic.

Keith Morris at Evolution Securitities says: “You need to drill deeper in the south, but that doesn’t mean there isn’t any oil.”

Today, the Falklands is a hive of activity. With national governments in the Middle East, Venezuela and Russia accounting for more than two thirds of global oil reserves, western oil firms must search further afield to secure their energy supplies.

As Peter Bassett, energy analyst at Westhouse says: “The easy stuff has been found; that is why you find BP and others drilling at far greater depths than ten years ago, as remaining deposits are much more difficult to get to.”

He adds: “And companies are moving into regions where hitherto there has been a relatively small foreign presence. Chinese firms are active in Sudan and Ethiopia, while the Europeans and Americans are eying Namibia and India. Even Greenland and the Arctic are being opened up for the first time. The Falklands are another leg of the same story.”

Sovereignty

The rush to find new reserves brings potentially explosive political issues to the fore and the Falklands is a case in point. Just weeks after Rockhopper announced that it had found signs of oil in South Atlantic waters, Argentina was asking the United Nations to broker talks on the Falkland islands’ future. Sovereignty over the islands is claimed by London and Buenos Aires and the two countries went to war in 1982 after the Argentinian invasion.

Successive British governments have argued that sovereignty is not up for discussion unless the islanders want it to be. And that seems unlikely for the foreseeable future. But Argentinian claims will intensify if large deposits of oil are found – geologists estimate that up to 60bn barrels of oil and gas could lie in Falklands waters, putting the region on a par with the North Sea.

Two weeks ago, a fifth UK firm disclosed its plans to drill off the islands after it raises £65m in a London stock market listing. Argos Resources is headed by John Hogan who worked on a Lasmo project off the Falklands in 1997.

Reaching the oil, and transporting it large distances by tanker to market, is viewed as challenging, but companies are confident that the South Atlantic islands can accommodate the infrastructure. Islanders have bought shares in a number of projects in the hope of making their fortunes.

Thousands of miles from Port Stanley, London-based Cairn Energy has begun drilling in Arctic waters between Greenland and Canada. The company recently won licences from the Greenland authorities despite worries from environmentalists that a spill in the region could be ecologically more catastrophic than the BP’s Deepwater Horizon disaster in the Gulf of Mexico.

Greenland is another oil frontier where western companies are queuing up to obtain prospecting licences as the great oil and gas rush gathers pace.

But Greenpeace said the Cairn move was wrong, not least because the firm was a relatively small company with “no harsh-conditions drilling experience.”

“We think it is completely irresponsible for Cairn to proceed with these operations when the US, Canada and Norway have imposed tough new restrictions on deepwater drilling until lessons can be learned about what exactly went wrong in the Gulf,” said Mads Flarup Christensen, secretary general of Greenpeace Nordic.

“Drilling in these kinds of waters is very sad. It shows the way the oil industry is being forced into the last frontiers by trying to exploit tar sands and deep water.”

Greenpeace has written to Kuupik Kleist, the Greenland prime minister, urging him to call a halt to the Cairn drilling programme, but it believes the country is overlooking the risks because it is desperate to find new income sources, having recently won political independence from Denmark.

According to Canadian energy economist Peter Tertzakian: “We are going to the ends of the earth to find the next barrel of oil.” But at what cost? Environmental pressure group Platform says the drive for “frontier oil” comes out of “a political environment whereby concerns over energy security are routinely top of the agenda”. To illustrate its point, Platform points out there has been a quickening in the race for rights to territory in the Arctic, with the Russians two years ago symbolically planting a flag under the North Pole during a submarine expedition.

But the last frontier is perhaps Antarctica. Signatories to the Antarctic Treaty officially refrain from any territorial claims on the continent, but some countries, including Britain, Australia and Russia, have made unofficial claims and produce stamps with maps of Antarctica showing territory purportedly belonging to them.

For small oil production and exploration firms, though, the lure of big money will always be an incentive for risk-taking. Just as biotech companies need only one medical breakthrough to make their names, so the energy minnows need only a single significant discovery to propel them into the limelight. On the stockmarket, they tend to attract a lot of speculative money. Success can make millions for shareholders overnight, but failure can bring a an abrupt sell-off of the stock as FOG discovered to its cost with many a punter getting his fingers burnt along the way.