Offshore Oil a 'Game-changer' for Falkland Islands

By Michael Warren

Stanley, Falkland Islands - Falkland Islanders are so accustomed to making do with what they've got that many still heat their homes with peat stoves, grow their own vegetables, repair their Land Rovers themselves and raise chickens for their soft-boiled eggs.

But now they've struck oil offshore — potentially vast stores of it. Billions of dollars in taxes and royalties could soon flow their way, creating an entirely unfamiliar challenge: the prospect of sudden and tremendous wealth.

If the first strike alone can attract the major investment needed to start producing crude, this closely knit community of 3,000 people mostly descended from sheep farmers, soldiers and sailors could find themselves richer than sheiks.

They'll rival the bankers of Liechtenstein and Lamborghini drivers of Qatar as the wealthiest people in the world.

Far from celebrating the millions of dollars that oil exploration is already pumping into their treasury, however, most islanders seem far more concerned about the troubles that rapid change might bring.

They like their way of life just like it is: tranquil, surrounded by nature and nearly crime-free.

"The important word here is 'potential' — bolded and underlined several times. I'm potentially a lottery winner," said Stephen Luxton, the government's mineral resources director. "Don't get me wrong: everybody's excited about it, but we're not going to spend money we don't have."

The reluctance comes from experience. Daunting political, technical, financial and environmental questions have kept the oil from flowing for years.

For one thing, Argentina still claims the "Islas Malvinas" despite nearly 180 years of British control and a failed occupation 30 years ago. President Cristina Fernandez is trying to use diplomatic and economic power to force Britain into sovereignty talks ahead of the April 2 anniversary of the 1982 invasion. Her Foreign Minister Hector Timerman said Thursday that Argentina will pursue "administrative, civil and criminal" penalties against the islands' "illegal" oil industry.

With neighbors like these, islanders hope Big Oil money will enable them to fund their own defense and gain leverage in global trade.

"Oil means security for us. If we go back to being sheep farmers again, would the U.K.government stick up for us as much? I'd like to think so, but maybe not," said Dan Fowler, a biologist born during the 1982 Argentine occupation.

Most islanders were tenant farmers who struggled to make a living on wool during their first 150 years as Britain's colonial subjects.

But now they are a self-governing British Overseas Territory, deciding for themselves how to tax and spend. 

And they will surpass Arab oil barons in per-capita wealth if they get even a fraction of the $10.5 billion in taxes and royalties some industry analysts predict will flow from the Sea Lion field, discovered north of the islands last year by Rockhopper Exploration PLC.

While Rockhopper seeks a $2 billion partner to move toward producing the crude, Borders & Southern Petroleum and Falkland Oil and Gas Ltd. are drilling two exploratory wells each this year in much deeper water south of the islands.

It's high-risk, high-reward, costing them $1.3 million a day with less than a 25 percent chance of success. 

But a big strike could prompt a rush to join what might be one of the world's last new sources of fossil fuels in an era of peak oil.

The southern basin could hold ten times more than the Sea Lion field's estimated 450 million barrels, with a potential payoff soaring above $100 billion, according to Edison Investment Research, a London-based financial analysis firm that published an optimistic "Falkland oils" report last month.

"It's a game-changer for the Falklands," said John Foster, a British board member of the Falkland Islands Company, the islands' largest private employer and a minority shareholder in Falkland Oil and Gas.

The money could go a long way in the rocky, wind-swept islands, where just a few gravel roads connect remote settlements to Stanley, the only town.

They need a permanent port for bigger oil, fisheries and cruise ships, and hotels and paved roads so visitors can stay long enough to see historic sites and wildlife. Expanded drilling will require a dedicated fresh water system, and economic growth will require more windmills for the wind energy that already provides a third of the islands' electricity.

Creature comforts might attract ambitious newcomers, creating a more sustainable and diverse economy. A bigger hospital could mean less travel to Chile or London for advanced care. More restaurants and a movie theater in Stanley would be welcome, and people naturally would like more money in their pockets.

But any windfalls will go straight into a sovereign wealth fund, islanders say. They don't plan to pay themselves dividends, and joke that no one should expect their ubiquitous Land Rovers to become gold-plated.

"It's not 'way-hay, party-time!' We're certainly thinking about the future," said Gavin Short, one of eight legislators. "We're not going to turn into a society where we all sit at home with our seven maids and gardener and watch the telly. We're all brought up to work."

Veterinarian Zoe Luxton, a distant cousin of Stephen's, has more fundamental concerns.

"Can this place survive it?" she asked. "Everything we're saying we're here for — not locking your doors, the freedom, the tranquility — can it survive so much money?"

The islanders are hiring experts to negotiate with major oil companies and plan for change, and examining how other small islands handled sudden wealth. Looking north of Scotland, they believe the Shetlands used oil royalties wisely to fund a vibrant economy, but that the Faroe Islands allowed oil to take over.

No one wants another Nauru, the Pacific "phosphate island" whose sudden mining wealth tripled the population, briefly making them the world's richest per-capita, but destroyed their way of life. Nauru's money disappeared through swindles and bad investments as the ground beneath them was shipped away. 

In less than a generation, the phosphate was gone, they had forgotten how to fish, and had to take in Australian inmates for income.

"They're broke, they've had it," Short said. "We've got only one shot at this and we've got to get it right. So we'll go out and hire the best expertise money can buy."

To attract investors, the Falklands promise some of the world's lowest royalties — 9 percent of the oil's value sold as crude, combining with taxes for a one-third take. Taxes and royalties top 40 percent in the U.S. Gulf of Mexico, 50 percent in Brazil, 70 percent in Norway and 80 percent in Malaysia, according to the Edison report.

Any royalties would still add up to far more than the current revenues of $40 million, mostly from fishing and oil industry fees.

Engineering and environmental challenges still abound in the frigid and stormy southern seas. The petroleum found so far is waxy when cold, so must be heated while shipped. Any major spill where penguins, whales, seals and other birds and marine mammals are drawn to unspoiled coasts could make Falklands oil a bad bet.

"The political fallout from any environmental damage would be toxic," Edison's otherwise bullish report noted.

Falkland Islands Company chairman David Huff, another British investor, said "you can't eliminate risk, it's a part of life."

But islanders have mixed feelings.

"You've got to be worried about it, haven't you? A couple of missing safety checks and human errors and you've got a major blowout for days," said Fowler, who hopes to make a career of studying wildlife in the islands. "On the other hand, where there is oil, there is more money to invest in environmental conservation."