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Falklands oil push exposes Argentine energy misfortunes
By Charles Newbery
Political tension is flaring up between Argentina and the UK over
the disputed Falkland Islands in the South Atlantic, with oil
emerging as a focal point in the conflict.
“The big battles of the 21st century are going to be over natural
resources,” Argentine President Cristina Fernandez de Kirchner
said in a February 7 speech to denounce what she believes is the
UK’s militarisation of the South Atlantic. Wealthy countries “are
preying on” the fish, oil and other natural resources in Latin
America, she said. She made the claims after Prince William,
second in line to the British throne, was sent to the Falklands on
military duty and the air defence destroyer HMS Dauntless was
While the UK said the moves were routine, Argentina called them
confrontational and took its concerns to the United Nations. The
issue has sparked nationalistic fervour in Argentina, which has
been seeking to reclaim sovereignty over the islands for decades,
which it controlled briefly in the 1830s. Transport unions vowed
to delay British or UK territory ships in port for 12 hours. This
could prove a concern for super-major BP, which has a contract to
deliver five cargoes of liquefied natural gas (LNG) to Argentina
The first delivery from Trinidad and Tobago was unloaded on
February 14. While the Argentine government is not behind the
protest, the goal is the same: to put pressure on the UK to sit
down for talks on the sovereignty of the archipelago, over which
the countries fought a war in 1982. Argentina claims the islands
as its own and calls them the Islas Malvinas.
Regardless of who is in the right, the spat is exposing a
troublesome issue in Argentina. It is importing more energy as its
oil and natural gas production dwindles. And this is happening at
a time when UK companies are searching for what could be big oil
in waters around the Falklands.
If the offshore efforts prove commercially viable, Argentina
could find itself sitting on the sidelines as the riches are
exploited by the UK and its own energy fortunes sink.
“They are robbing the natural resources of our continental
platform from right under our noses,” Enrique Omar Suarez,
secretary-general of the Argentina Union of United Maritime
Workers, said in a radio interview on February 16.
The tension between the countries resurfaced in 2010 with oil
exploration in the North Falkland Basin by several UK companies
such as Rockhopper Exploration and Falklands Oil & Gas.
Attention is now focused on the South Falkland Basin, where the
drilling of the first of four wells in unexplored deepwater plays
could prove a boon for the companies as well as the islands and
London-based Edison Investment Research this month said the
Falklands was looking at a potential prize of US$180 billion in
royalties and taxes if 2012 drilling proved successful, of which
US$10.5 billion would likely come from Rockhopper’s Sea Lion
That is vastly more than the Falklands’ current tax revenue of
US$40 million. It is also more than Argentina’s US$124 billion in
tax revenue in 2011.
Argentina does have its own treasure trove: vast resources of
shale oil and gas.
But big money is needed, and it could be tough to woo oil
companies to Argentina, where conditions can change swiftly to the
detriment of investors.
Investment flooded into Argentina in the 1990s, transforming the
country into a net energy exporter. But companies pulled back
after a 2001-02 economic crisis led to a rise in state
intervention in the sector, including higher taxes, export
restrictions and price controls.
As it became harder to do business and make profits, energy
output plunged. Oil production dropped by around 33% to 570,000
barrels per day in 2011 from a record 847,000 bpd in 1998, while
gas fell 13% to 125 million cubic metres per day from 143.1 mcm
per day in 2004.
Worse, proven reserves of gas, which meets about 50% of the
country’s energy needs, tumbled to 358.7 billion cubic metres
(12.67 trillion cubic feet) on December 31, 2010, from a record
777.6 bcm (27.5 tcf) on December 31, 2000.
This has exposed the country to deepening energy shortages and
In January, President Fernandez de Kirchner reproached oil
companies for failing to invest, holding them responsible for a
110% rise in energy imports in 2011 from 2010.
This sparked a shift in national energy strategy after years of
failing to secure investment. Now the government is ordering
companies to invest more or lose field licences.
The pressure has been strongest on Yacimientos Petrolíferos
Fiscales (YPF), which has seen a sharp decline in energy output
even as the biggest player.
Backed by Spain’s Repsol, YPF responded to the government’s
pressure by saying its shale resources could allow Argentina to
replicate the shale boom of the US. Indeed, it raised its estimate
of shale resources in a region of the southwestern Neuquen Basin
to 22.8 billion barrels of oil equivalent from a November 2011
estimate of 927 million boe. The company said US$28 billion was
needed to develop the resources, a staggering figure given that
the market value of YPF is around half that amount.
“The shale resources are there, but who is going to develop
them?” asked Federico MacDougall, an economist at the University
of Belgrano in Buenos Aires. “YPF could. But now it is under
attack. There are other developers, but who wants to enter the
game? They could put money in and lose or not put money in and
lose. You lose either way. That’s the risk of investing in
Argentina,” he told EurOil.
The uncertainty of investing in Argentina means that “nobody is
investing on the scale that is needed in the country,” he said.
The large shale potential has sidelined offshore exploration in
Argentina, so far limited to the Austral Basin at the southern tip
of the country.
Another setback to offshore exploration came in 2011, when YPF,
BP-backed Pan American Energy and Brazil’s state-run Petrobras
came up dry at a well in the Malvinas Basin to the west of the
South Falkland Basin.
There may be good possibilities off the country’s coast, but
Argentina’s shale potential is gaining most of the attention, Juan
Rosbaco, an energy consultant in Buenos Aires, told EurOil.
He estimated that it would take between five and seven years to
put the potential into production if the investment came through.
In the meantime, the energy situation will remain difficult in
Argentina, he said.
“We will have five tough years before we can start returning to
self sufficiency and eventually become an exporter,” he said. But
to do this, “you have to find money and do things well. And you
have to do them fast because the results won’t be immediate,” he
The UK may develop oil in the Falklands quicker – and this could
make it harder for Argentina and its sovereignty claims over the
For the UK, the islands are strategic for maintaining vigilance on
the Strait of Magellan and for any future development of natural
resources in Antarctica, MacDougall said.
If oil is produced, the Falklands “could supply big revenue to
[the UK],” he said. And this, he said, could potentially replace
any lost oil revenue if Scotland were to become independent and
gain control over 90% of North Sea oil and gas, as claimed by Alex
Salmond, Scotland’s first minister.
Falklands oil production “will be a bucket of cold water for
Argentina because it will lose potential revenue in royalties and
it will become even harder to recover the islands,” he said. “It
will be practically impossible. Who would want to leave a big
source of oil to a country that has already lost a war over it?”
Indeed, MacDougall said that it was unlikely that Argentina would
merely walk away from such a large source of oil, and leave it to
the UK when it has already lost a war over the islands.
However, with neither Argentina nor the UK giving any ground
away, it appears unlikely that a situation will arise where
Falklands oil revenue is felt in Argentine coffers. Indeed, upon
the flare-up of relations between the two in 2010, former Member
of the Legislative Assembly (MLA) Emma Edwards, Falklands minister
for hydrocarbons, told EurOil:
“In 1995, a joint declaration on an area to the southwest of the
Islands was signed. This was revoked by the present Argentine
President in 2007. With the current Argentine president in power I
do not see any future UK-Argentina joint development deal, as
Argentina would have to recognise the Falkland Islands