Desire Petroleum PLC has stated that the oil rig Ocean Guardian has arrived in the North Falkland Basin and that it has commenced drilling for oil about 60 miles North of the Falkland Islands. Desire’s shares spiked 10% on the news.

The prospect of this has recently re-opened old wounds, with the Argentines scaling up the wear of words with the UK over the sovereignty of the disputed islands. It has even ‘imposed’ new restrictions on all shipping operating in the vicinity of the Falklands.

Since then Latin American and Caribbean leaders have weighed in and put their support behind Argentina.

The problem for Argentina is that they have something like $13 billion worth of debt that needs re-servicing this year. Coupled with a budget deficit hole in the billions and you can see their keenness for cash. But they also unilaterally threw any prospect of a joint venture with the UK in the bin in 2007. That decision was made by the husband of the present president of Argentina, Nestor Kirchner.

Since Shell pulled out of exploring for oil in this region in the 1990s, the price of oil has gone up from $10 a barrel to over $75. Then of course there is the advances in technology that have taken place. Overall, where Shell saw no real pay-back for investing in oil operations in the South Atlantic, the new boys such as Desire, Rockhopper, Falklands Oil and Gas and BHP Billiton obviously thinks there is. Just getting the Ocean Guardian down to the area, which took about two months to achieve, would have cost in the region of $245,000 a day.

The companies concerned are very bullish about their prospects in the region. If, as they expect, oil is found in sufficient quantities then we will start to see a huge upturn in activity in this otherwise relatively quiet area of the world.

Fishing, sheep and a bit of tourism as well as living with soldiers (0.5% of the UK defence budget) is what the islanders are used to. The arrival of a massive oil and gas industry will transform their lives. Especially if the support for the operations has to be totally based on the Islands owing to the political situation. It will ensure that the islanders really benefit from the industry.

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