For those pioneering companies that have led early exploration activity in the frontier waters of the Falkland Islands, otherwise known as the Malvinas in the South Atlantic, this highly controversial and remote outpost is on the threshold of a whole new phase in its upstream evolution.

One of those in the vanguard has been Falkland Oil and Gas Ltd. (FOGL), a UK independent in the midst of finalizing the last details of a merger with one of its fellow pioneers, Desire Petroleum.

Amidst increasingly jingoistic and public threats made by Argentina’s political leaders toward all companies participating or considering taking part in the fledgling activity around this chain of small islands – some 480 km (298 miles) from the nearest landfall in South America – and the equally blunt responses from Britain’s leaders over their sovereignty, the companies themselves are keeping their heads down and getting on with the long-term job of driving forward plans that could see this province produce first oil and gas as soon as 2018.

FOGL-Desire merger

FOGL’s CEO, Tim Bushell, is focused very much on guiding his company toward being part of that dream. Since joining in 2006 from Paladin Resources, where he was managing director of that company’s Norwegian activities for five years, he has helped bring FOGL to a point where it is now involved in all of the key areas to the north, south, and east of the islands. Prior to Paladin he also served as general manager for the South Atlantic business unit at Lasmo, which included a drilling campaign in the North Falklands basin in 1998, giving him vital experience with the region’s potential.

FOGL’s recent approximate US $100 million merger with smaller independent Desire and a simultaneous and conditional farm-out deal announced in parallel with fellow Falkland players Premier Oil and Rockhopper Exploration were pretty much “no brainers,” he said. The deals give FOGL near-term exposure to a five-well, fully funded high-impact exploration program across all the major basins and plays in the Falklands that is scheduled to get under way later this year or early 2015, depending on rig availability.

According to Bushell, the combination with Desire was “a compelling opportunity” to consolidate the portfolios of the companies, diversifying the risk profile for their shareholders and “enabling the combined group to move forward with an active, long-term program for growth in the Falkland Islands.”

He added, “The transaction provides FOGL with access to Desire’s interests in the North Falkland basin [including the Sea Lion area], which we believe are highly complementary to our existing exploration portfolio in the south.”

Five-well exploration program

Bushell, who is CEO of the newly formed group in which FOGL’s original shareholders now own 60% and Desire’s the remainder, said the acquisition leaves it with $170 million in cash to help fund the five-well exploration program.

The company will need a good chunk of that money to do that, although the farm-out agreement it signed with Premier and Rockhopper for its interests in licenses PL004a and PL004c has helped to ease the financial burden. These two will enter the licenses in exchange for fully funding the newly combined entity’s share of the cost of a pair of wildcat wells – one in each block. FOGL/Desire will hold 40% in both of these North Falkland licenses, having previously held 92.5% of PL004a and 75% of PL004c.

The overall drilling program will see five wells spudded, including a total of three in the North Falkland basin, with one targeting the Zebedee prospect. Two will be spudded in the South Falkland basin in partnership with Noble Energy and Edison International (targeting the Jayne and Isobel prospects), Bushell said. The wells will be drilled across three basins, all testing different play types.

Since earlier in 2013, Desire had been seeking investment to be able to finance further exploration to the north of the Falklands, close to the Sea Lion oil field.

Sea Lion FPSO

Premier and Rockhopper are already heavily occupied by their more advanced plans for a two-phase development of Sea Lion, which was discovered in 2010 and is intended to be the islands’ first flagship oil project. It is being studied for development, most likely via an FPSO vessel, with first oil to flow as soon as 2018.

FOGL, which before the Desire deal had held licenses to the south of the Falklands, not only gained acreage to the north of the islands but also a minority stake in the Sea Lion project.

A rig-share agreement is expected to be put in place for all the operators with drilling plans in the Falklands area to spread the mobilization costs.

Noble and Edison will fund the two wells to the south and east of the Falklands at a cost of about $100 million per well, while Premier and Rockhopper will fund two more targeting the Isobel/Elaine and Jayne East prospects further to the north at an estimated cost of about $50 million per well, according to Bushell.

FOGL will contribute about $20 million to a fifth well targeting Zebedee in partnership with Premier and Rockhopper. The difference in the well costs is “mainly because of the water depth,” Bushell added. “The south has much deeper water, so the wells are more expensive.”

Reserves potential is something that the islands have in abundance, but their remote location, deep waters, harsh environmental conditions, and lack of infrastructure are considerable challenges faced by oil companies.

UK-Argentine tension

Another challenge is the continued threat emanating from Argentina’s leaders, who have stated that companies seeking to operate there will face 15-year jail terms, huge fines, confiscation of assets, and banning from any activity in Argentina, where unconventional exploration and development activity is on the rise.

The long-running depth of feeling within Argentina’s populace and government about the Malvinas should not be underestimated. The government of President Cristina Fernandez has issued repeated written legal warnings to firms, saying the UK’s licensing of activity there is “manifestly contrary to Resolution 31/49 of the UN General Assembly, which requires the UK and Argentina to refrain from taking decisions that would imply introducing unilateral modifications into the situation of the Malvinas Islands while the sovereignty dispute between the two countries is still pending.”

The UK Foreign Office insists the activities are wholly legitimate and legal on the island – a British overseas territory that voted to stay that way in a referendum last year.

A UK Foreign Office spokesperson said, “Hydrocarbons activities by any company operating on the continental shelf of the Falkland Islands are regulated by legislation of the Falkland Islands government, in strict accordance with the United Nations Convention of the Law of the Sea. As such, these activities are wholly legitimate and legal. The UK government unequivocally supports the right of the Falkland Islanders to develop their natural resources for their own economic benefit.”

Business as usual

Bushell is apparently unperturbed by such language. FOGL recently confirmed the latest 3-D seismic shoot was under way, with the PGS Ramform Titan shooting a survey within the northern area. The survey, expected to take up to four months, is being operated by Noble Energy.

Fast-track data from two previous surveys also are being interpreted. The data have enhanced understanding of potential prospects within the area adjacent to the Darwin gas condensate discovery. A full assessment of all the prospects covered by both surveys will be undertaken using the fully processed 3-D data expected to become available this month. The interpretation results should be available by the end of that quarter.

“This is our final survey prior to the commencement of drilling operations in late 2014,” Bushell said. “Upon completion, we will have acquired more than 10,000 sq km [3,861 sq miles] of high-quality 3-D data, which is equivalent in area to more than 40 North Sea blocks. This illustrates both the scale of our assets and the commitment of the joint venture to the ongoing exploration program.”