The last thing that Falkland Island’s based oil explorer Rockhopper Exploration needed in the wake of a plunging oil price was more uncertainty about its ability to develop the oil resources in the Falkland Islands basin, as it gets set to report full year results.
Unfortunately that’s what it might get after a UN Committee ruling on the Falkland Islands recommended that Argentina’s maritime territorial waters extended into the North Falkland basin and included the Falklands Island’s itself.
This ruling, though not legally binding, complicates the situation regarding Falkland Island oil exploration. There have always been concerns that Argentinian officials could try and criminalise oil company activities and seize any potential assets on the South American mainland, for any oil epxlorers that it feels are violating what it perceives are its sovereign interests.
The UN’s announcement on extending Argentina’s maritime territorial waters, while deeply contentious, given the area is disputed, opens up the prospect that Argentinian threats will have some cloak of respectability, and that could well be bad for future investment, let alone revenues.
Currently oil and gas licences are issued by the Falklands Island government, and while oil prices are near multi year lows this ruling may not be a major issue now. But when prices recover, what happens to the oil revenues if Rockhopper, or any other explorer has found oil in disputed territories?
If the UN ruling is upheld, which seems unlikely given the self-determination and sovereignty issues, then diplomacy will be required to untangle any disputes. Ultimately this will delay investment and potentially cause some oil companies to pull back from the region. Argentina does have previous for interference in the private sector, nationalising YPF, at the time a subsidiary of Spain’s Repsol.
While the new government of President Mauricio Macri is more pro-business than the previous incumbent Christine Kirchner, populist risks are likely to remain which means any potential new agreement could take time. There are precedents for disputed oil territories with the Baghdad/Erbil oil agreement, but even this took time as eventually pragmatic heads finally won out.
Any uncertainty surrounding future costs, particularly in disputed areas could well delay future investment. When drilling started in the North Falkland Basin in 1998 it became potentially one of the most lucrative parts of the region.
The Sea Lion field discovered in 2010 by Rockhopper was estimated at the time to have the potential to generate taxes and royalties in the region of £50bn for both the Falklands and the UK government over the lifetime of the field. For the Falkland Islands alone the field could generate up to $5bn by the end of the decade.
Oil companies currently pay a 9% royalty on any oil produced, and corporation tax at the local rate of 25%. If they had to pay taxes to Argentina as well then costs would go up affecting the margins of the companies extracting the oil and gas.
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