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C O N F I D E N T I A L SECTION 01 OF 03 LONDON 000440 
 
NOFORN 
SIPDIS 
 
E.O. 12958: DECL: 02/24/2020 
TAGS: EPET ECON ENRG PREL AR UK
SUBJECT: UK DEFENDS OIL EXPLORATION IN FALKLAND ISLANDS 
WATERS 
 
LONDON 00000440  001.3 OF 003 
 
 
Classified By: Economic Minister Counselor Richard Albright for reasons 
 1.4 b & d 
 
 ¶1.  (SBU) Summary:  Tensions between the UK and Argentina 
have risen over the past week over a new drilling campaign in 
the Falkland Islands Outer Conservation zone following the 
arrival of the Ocean Guardian oil rig in the North Falkland 
Basin.  Argentina contested the right of the Falkland 
Island's Government to license drilling for oil off the coast 
of the islands, a British Overseas Territory.  UK Foreign 
Secretary David Miliband firmly defended the oil exploration 
as being in accordance with international law.  Desire 
Petroleum, a UK-headquartered company, started drilling the 
first well on February 22 following five years of 
preparation, including acquiring production licenses. 
Exploration and production licenses are approved by the 
Governor of the Falkland Islands, following consultation with 
the UK's Foreign Secretary.  The new drilling campaign is 
expected to last approximately eight months, as at least two 
other companies with E&P licenses within the Falklands 
Conservation Zone make use of the rig sequentially.  Desire 
confirmed that Argentina's actions will not disrupt its 
activities and  said it had worked closely with the UK's 
Foreign and Commonwealth Office (FCO) to try to avoid 
inflaming tensions.  With the exception of the Falklands, HMG 
seeks to continue a normal relationship with Argentina. End 
summary. 
 
UK Defends Oil Exploration in Falkland Islands 
------------------------ --------------------- 
 
¶2.  (U) Tensions mounted between the United Kingdom and 
Argentina ahead of a drilling operation in the Falkland 
Islands conservation zones by a UK company, Desire Petroleum. 
 Argentina contested the UK's right to drill for oil off the 
coast of the Falkland Islands, a British Overseas Territory, 
and introduced a requirement that vessels traveling to the 
Falklands through Argentine waters obtain permits.  Foreign 
Secretary David Miliband strongly defended the oil 
exploration during a February 18 BBC radio interview, saying 
it is being conducted in accordance with international law. 
In a statement February 23, Chris Bryant, the UK's Foreign 
Office Minister with responsibility for the British Overseas 
Territories, reiterated UK support for the oil exploration. 
He said the Falkland Islands government is entitled to 
develop a hydrocarbon industry within its waters.  He said 
the UK will continue to support the islands in developing 
this "legitimate business in its territory."  The Falkland 
Islands' Legislative Assembly also asserted its right to 
develop a hydrocarbon industry within the Islands' waters in 
a February 18 press release. 
 
¶3. (C) Andrew Allen, Head of the Southern Oceans, team in 
FCO's Overseas Territories Directorate, told us February 24 
that no UK government would negotiate the sovereignty of the 
Falklands with Argentina without the approval of the 
islanders, who overwhelmingly opposed any such discussions. 
He emphasized HMG desire to continue cooperation with 
Argentina on all other issues.  He said that Argentina 
appeared to be taking a similar same stance, noting a GOA 
statement that it would proceed in legal, diplomatic ways. 
Allen said the Argentine Government had so far applied its 
decree requiring permits for shipping between the mainland 
and the Falklands only to one ship and that cruise ships were 
continuing travel between Argentine ports and the islands. 
In any event, he said there was little shipping and air 
traffic between the Falklands and Argentina.  Allen noted 
that the main supply links to the islands were a weekly 
flight to Chile and cargo shipping to and from Uruguay and 
Brazil. He expressed some concern that these countries could 
in the future be tempted to restrict those links out of 
solidarity with Argentina. 
 
¶4.  (SBU) Desire Petroleum started the new drilling campaign 
on February 22.  Drilling on the "Liz" well in the North 
Falkland Basin is expected to last 30 days.  An oil rig 
platform, the Ocean Guardian, which is owned by U.S. based 
Diamond Drilling, was towed from Scotland and arrived 
approximately 62 miles north of the islands in the South 
Atlantic on February 19.  Desire  said the rig is firmly 
inside British waters and that Argentine protestations would 
not disrupt its activities.  (Note: Julia Painting, Head of 
the Falkland Islands section within the FCO's Overseas 
Territories Directorate, said the Falkland Islands' waters 
extend 200 nautical miles off the coast of the islands and 
consist of the Falkland Interim Conservation Zone of 100 
nautical miles (FICZ) and the Falkland Outer Conservation 
 
LONDON 00000440  002.3 OF 003 
 
 
Zone of 200 nautical miles (FOCZ).  There are several "kinks" 
in the conservation zones where they meet the Argentinean 
Exclusive Economic Zone.  End note.)  Another official in the 
same office explained to us that the FOCZ is the Falkland's 
Exclusive Economic Zone, in all but name.  Earlier 
governments had decided to use FICZ and FOCZ to avoid 
arousing tensions over the term.  The official noted that a 
drilling rig had operated in the FOCZ in the late 1990s, 
provoking no protests from Argentina.  According to FCO, this 
was a period when then President Menem was seeking 
cooperation with the Falklands. 
 
Falkland Islands Oil Licensing System 
------------------------------------- 
 
¶5.  (SBU) Oil exploration and production within the 
Falkland's conservation zones require licenses granted by the 
Islands' government.  Plans to drill must be approved by the 
Governor of the Falkland Islands.  The Governor grants 
approval having consulted with the UK's Foreign Secretary. 
All applications are scrutinized by both the Falkland Islands 
and UK authorities.  The Falkland Islands' Department of 
Mineral Resources advises the Islands' Governor with regard 
to local exploration concerns.  Officials from the UK's 
Department for Energy and Climate Change (DECC) told us DECC 
only offers technical advice to the UK's Foreign and 
Commonwealth Office (FCO).  However, they noted that 
decisions regarding the development of the Falkland Islands' 
hydrocarbon industry are ultimately a matter for the Falkland 
Islands government. 
 
¶6.  (U) The licensing system consists of exploration licenses 
and production licenses.  Exploration licenses allow 
companies to gather seismic, gravity, magnetic, geochemical, 
and sea-bed data and do not allow drilling deeper than 350 
meters below the sea-bed.  They are not area-specific and can 
apply to all of the designated area ) which covers 400,000 
kilometers squared, approximately 50 percent bigger than the 
UK's North Sea.  Licenses are typically awarded for one year, 
but can be renewed for up to three years.  Production 
licenses are area-specific and provide exclusive rights for 
surveying, drilling and production.  They are awarded through 
occasional competitive rounds or, more typically, under an 
open-door system.  Bids for open-door production licenses can 
be made at any time for any number of whole blocks (12' 
longitude by 10' latitude) up to a total of 30 continuous 
blocks in any one license.  Applicants can determine the size 
and shape of the area they bid for and there is no limit to 
the number of licenses that can be applied for at any time. 
 
¶7.  (U) The Falklands' fiscal system comprises a variable 
acreage rental, 9 percent royalty on production, and 26 
percent corporation tax on profits.  Acreage rentals are 
payable annually in advance.  Rents vary depending on the 
license phase and whether the license was awarded as a result 
of a competitive licensing round or as the result of an 
open-door invitation.  There are no signature bonuses, no 
production sharing contracts, no back-rights and no local 
market discounts.  The Falkland Islands welcome applications 
from companies worldwide.  However, according to the 
Department of Mineral Resources, the Falkland Islands 
government is unlikely to grant a license to any applicant in 
which Argentine interests hold more than a 49 percent stake. 
 
¶8.  (U) Existing production license holders are: Desire 
Petroleum, Argos Resources, Falkland Oil and Gas Ltd/BHP 
Billiton, Borders and Southern Petroleum, and Rockhopper 
Exploration.  Previous operators have included Shell, Amerada 
Hess, Lasmo and IPC/Lundin Oil.  Most of the current license 
holders are listed on the London Stock Exchange's Alternative 
Investment Market (AIM).  All combined, they have raised in 
excess of GBP 250 million in recent months to fund drilling 
operations. 
 
Desire Petroleum 
---------------- 
 
¶9.  (SBU) Desire Petroleum, which has started the new 
drilling campaign, is dedicated to explore for oil and gas in 
the North Falkland Basin.  It was founded in 1996 and is 
listed on the London Stock Exchange's Alternative Investment 
Market (AIM).  It participated in the first round of drilling 
in the North Falkland Basin in 1998 and currently operates 
six licenses in the area.  It estimates recoverable oil 
potential in the region at 3.5 billion barrels, with gas 
reserves of over 9 trillion cubic feet.  (Note: ExxonMobil 
International Chairman Brad Corson told us he does not 
 
LONDON 00000440  003.3 OF 003 
 
 
believe there is enough oil on the Falkland Islands 
Continental Shelf to be profitable, citing Shell's earlier 
oil exploration attempts which they abandoned.  End note.) 
 
¶10.  (SBU) The current drilling campaign is expected to last 
approximately eight months, according to Ben Willey, a 
spokesman for Desire.  Willey told us that if all runs 
smoothly, the Ocean Guardian rig will drill between six and 
eight wells.  The first well, already underway, is for Desire 
in the North Falklands Basin.  The drilling is expected to 
last 30 days.  After this, the rig will start on a second 
well, also in the North Basin, for Rockhopper Exploration. 
The third well will be drilled for the Falkland Oil and 
Gas/BHP Billiton joint venture, the fourth for Rockhopper and 
the fifth for Desire.  Depending on the success of these 
wells, Desire may decide to drill up to three additional 
wells.  Its contract with Diamond Drilling, the rig owner, 
allows for up to eight wells. 
 
¶11.  (SBU) Willey stressed that Desire worked very closely 
with the UK's Foreign and Commonwealth Office (FCO) over the 
past five years throughout the planning stages of the 
drilling campaign.  During the past few weeks, while tensions 
with Argentina have mounted, he said Desire has sought 
further advice from the FCO and cleared all statements with 
the department to ensure the company does not further inflame 
the situation.  Willey said Desire has also built good 
relations with the Falkland Islands government.  He confirmed 
that the rig passed entirely through international waters on 
its journey from Scotland to the North Falkland Basin. 
 
Additional Companies Operating In The Falklands 
--------------------- ------------------------- 
 
¶12.  (U)    -- Rockhopper Exploration, also AIM-listed, has 
licenses to explore for oil and gas in the North Falkland 
Basin.  It raised GBP 50 million through an equity placement 
in late 2009 to finance its 2010 drilling campaign in the 
Falklands. 
 
            -- Falkland Oil and Gas, which is also an 
AIM-listed UK company, focuses on oil and gas exploration in 
the undrilled South and East Falkland Basins.  It is involved 
in a joint venture with BHP Billiton. 
 
            -- BHP Billiton is an Anglo-Australian natural 
resources company.  It is one of world's largest mining 
companies and its products include petroleum, aluminum, iron 
ore, diamonds, manganese and coal.  BHP Billiton owns a 51 
percent stake in its joint venture with Falkland Oil and Gas. 
 The joint venture was agreed in October 2007. 
 
            -- Borders & Southern Petroleum focuses on 
emerging hydrocarbon systems.  Its first project is based in 
an untested basin to the south of the Falkland Islands.  The 
company was awarded its first exploration license in the 
Falkland Islands in 2004 and in 2005 listed on the AIM, 
raising GBP 10 million. 
 
            -- Argos Resources is a private exploration 
company and holds a production license in the North Falkland 
Basin. 
 
¶13.  (C) Comment: UK government officials have made public 
statements asserting  the right of the Falkland Islands to 
issue exploration and production licenses in its conservation 
zones in accordance with international law.  However, they 
have sought to downplay the row and the impact it could have 
on the UK's relationship with Argentina and other Latin 
American countries.  HMG has attempted to avoid escalating 
tensions and has stressed HMG's desire to pursue normal 
relations with Argentina in all other matters.  FCO hopes 
that Argentina will proceed similarly. 
 
Visit London's Classified Website: 
http://www.intelink.sgov.gov/wiki/Portal:Unit ed_Kingdom 
 
SUSMAN