The oil and gas industry in the Falkland Islands continues to advance during this period of low oil prices despite its harsh deepwater terrain, remote location, limited dedicated infrastructure and significant subsurface risk. A change in government in Argentina, regional industry consolidation and a lower-cost environment mean the islands’ first project, Premier Oil’s Sea Lion, is moving closer to commercialisation.

Argentina’s recent confrontational political rhetoric is expected to be tempered under President Mauricio Macri, inaugurated in December 2015. During the previous administration, the government discourse was one of sovereignty dispute. Companies operating in the Falklands were denied access to participation in Argentina, and international oil companies with significant operating assets in the country, such as Total and Chevron, sought to avoid damaging their working relationship with the government.

In April 2015, a federal judge ordered the seizure of assets of companies drilling in the Falklands, including Premier Oil, Rockhopper Exploration, Falkland Oil and Gas, Noble Energy and Edison International Spa. It’s now likely that the special agency created in 2013 by then-President Cristina Kirchner to handle related Falkland Islands affairs will be closed.

The new Argentinian Government has indicated a clear position of enacting market-friendly reforms, including rolling back regulations, reaccessing international financial markets and encouraging foreign direct investment. During its first international interactions, the new administration has shown a clear change in foreign policy, diversifying the former Peronist and regionalist approach, and seeking increased international engagement with countries and blocks such as the US, UK and European Union. With particular reference to energy policy, the new government has announced that it will look for improved dialogue with Brazil, Uruguay and Chile.

While only 15% of the total blocks have been awarded, farming in to existing licences has been the primary strategy for participation in the basin. With an extensive list of prospects identified in licensed blocks, farm-ins will continue to be the main entry tactic for new companies. In November, Rockhopper Exploration and Falkland Oil & Gas (FOGL) reached a merger agreement that will make the combined company the largest licence-holder in the northern basin.

Phased change

In 2000, the regional government changed to an open door policy that allowed application for a licence at any time. In the first bidding round in the Falkland Islands in 1996, a total of 14 companies were awarded exploration licences. Since then, at least 20 companies have been involved in exploration but, of the initial participants, Desire Petroleum is the only one still present.

In subsequent rounds in 2001-05, companies such as Falkland Oil and Gas, Rockhopper and Borders & Southern acquired participating interests in offshore blocks. The remaining companies with participation, including Denholm, Premier Oil, Edison and Noble, acquired equity through farming in.

The Falkland Islands offer a flexible set of work programme options for operators to commit to once a licence has been obtained. After phase one, licensees enter into phase two, which carries a drilling commitment for seven years. Currently, all of the licences awarded in the Falkland Islands are in phase two.

Current prospects

The current landscape supports maturing existing prospects and building upon existing work, rather than developing new opportunities. Operators have consistently drilled in the basin with an eye on establishing value and progressing commercial development. In 2012, Borders & Southern, and Falkland Oil and Gas drilled a total of four wells in the east and south basins. More recently, in 2015, Premier Oil continued exploration and appraisal drilling in the northern basin. In 2015, Ocean Rig’s Erik Raude drilled three wells in the basin, one at the Zebedee prospect and two at Isobel Deep. The $635,000-a-day contract originally expired in November 2015, but the drillship continues operating in the region.

Premier Oil will now drill the Chatham prospect, testing the area near its Sea Lion field, and then Noble intends to drill the Rhea prospect, where multiple reservoir targets have been identified. If the Erik Raude contract is not extended beyond this, with additional harsh-environment fifth, sixth and seventh-generation drillships currently stacked, the market will be loose, and rates could be lower should a new rig be signed to explore the Falkland Islands by regional operators.

Results released in January from the Isobel Deep II well confirmed the original oil discovery with 88ft net pay and oil quality similar to Sea Lion, in addition to finding a new oil-bearing sandstone. Isobel Deep I was shut in after unexpected high pressures were encountered; however, Sea Lion has shown limited pressure that may require downhole pumps and gas lifts, with initial development plans including gas and water injectors.

Darwinian discovery

Every operator has reported geological assessments for their identified prospects and, in general, the north basin reservoirs are interpreted to be thick sands with good porosity of around 20%, whereas the geology of the south basin is tighter and more laminated based on the available cores assessed, with the exception of the Darwin discovery.

In the south basin, although several gas condensate prospects have been identified, after five dry wells, the most promising discovery remains Borders & Southern’s Darwin. The company has stated its interest in leveraging lower drillship rates to attract additional partners to help fund the appraisal programme required to establish high confidence in commerciality. The high quality of the Darwin gas condensate discovery could require fewer development wells, and the operator is positive about comparing favourably to other offshore ventures at sub-$40 oil prices.

In 2015, Ocean Rig’s Erik Raude also drilled a well in the south basin, at Noble’s Humpback prospect; however, the operator deferred its option to drill another well in the basin, and the rig moved back to the north basin to drill Isobel Deep II.

A 2010-12 drilling campaign led by Desire Petroleum and Rockhopper Exploration resulted in 11 wells drilled. The most successful discovery in the region, maturing towards commercial viability, is Sea Lion. The development strategy presented for the field, and also considered most likely for Darwin, is through the use of an FPSO, which adds flexibility and for which leasing costs have halved. The FEED for the FPSO has been awarded to SBM Offshore. GlobalData estimates a rate of return of 8% under a flat $40.00 oil price and a break-even price of $36.85. Under the assumption of an escalating oil price, returning to $60.00 in ten years, the rate of return improves to 15%.

Originally to be developed over four phases, a new plan proposed in 2016 combines the first two phases and additional wells. This additional production optimises the initial capex and reduces risk significantly, improving the net present value in a $40-a-barrel scenario.

Additional phases in the plan include a second FPSO to develop other nearby discoveries – such as Casper and Zebedee in phase two, and Isobel and Elaine in phase three. Connectivity between these reservoirs has been increasingly established through ongoing appraisals.

Local involvement

To date, exploration activities have been well served by local services. In particular, logistics services that include fuel supply, charter flights, accommodation and provision of security have been carried out by local companies such as Byron Marine and the Falkland Islands Company.

There are industry initiatives, such as one led by the Falkland Islands Development Corporation (FIDC), to anticipate the needs of development work by linking local suppliers of services with oil and gas companies through a directory. Operators such as Noble Energy and Premier Oil have already used this forum to communicate and set initial guidelines on their expectations from contractors.

There is no local content requirement for development, but FIDC, the Falkland Islands Government and its Chamber of Commerce have been assessing the best way to have local industry informed and alerted for establishing a local content policy that gives Falklands companies an opportunity to be tender-ready without requiring a minimum local spend.

While securing a willing partner and additional funding may prove more challenging in the current environment, other favourable conditions support momentum towards commercialising discoveries in the basin. With smaller companies involved, it will not carry the publicity of the recent Liza discovery in Guyana by ExxonMobil, but the sector is developing steadily, looking to appraisal of its many prospects and first oil at Sea Lion by the end of the decade.