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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 deployed there. 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 this year. 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 the UK. 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 development. 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 rising imports. 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 added. The UK may develop oil in the Falklands quicker – and this could make it harder for Argentina and its sovereignty claims over the archipelago. 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 Government.”
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