Falklands oil boom in doubt after test rig's poor results

HOPES of an oil boom in the Falklands were dealt a major blow after the first oil well drilled off the islands for a decade produced only poor quality oil.

Desire Petroleum saw its shares crash 48 per cent after its initial update on the controversial project, which recently sparked tensions between the UK and Argentina over the islands.

The UK firm said it would know whether to drill deeper, pause for testing or abandon the Liz well once operations and analysis are completed later this week.

Plans to drill for oil around the islands sparked a diplomatic spat between the UK and Argentina, who fought a bitter war over the territory in 1982.

Britain refused US Secretary of State Hillary Clinton's offer to broker talks between the two sides recently, insisting there was nothing to discuss about the sovereignty of the islands.

Yesterday, Desire said its operations in the North Falkland Basin well have shown "oil may be present in thin intervals but that reservoir quality is poor".

Oil industry experts last night insisted that the islands' potential to create a new oil industry may have been exaggerated.

A spokesman for broker Westhouse Securities said: "Expectations ran high ahead of the start of drilling for both companies and this morning's share price reflects the market's significant disappointment with news to date."

But Westhouse said the shares sell-off was overdone and added that while there may be implications for drilling at other wells in the area planned for later in the year, only the Liz project would be removed from forecasts.

"While clearly not the commercial success the companies were hoping for, it is still very early to declare the drilling campaign a failure," the analysts said.

Desire's oil platform, the Ocean Guardian, was towed 8,000 miles from the Cromarty Firth in Scotland to the Falklands last month.

Despite Desire's disappointing announcement, Alan Sinclair, analyst at Seymour Pierce, thought there may be a future for the oil industry around the Falklands.

"Whilst the market may have been looking for seagull-scorching test results from Liz, it should be borne in mind that this is the first of a potential six-well programme by Desire," he said.

Argentina has threatened to take "adequate measures" to stop oil exploration in the waters around the islands, which it claims sovereignty over as the Malvinas. It has won support from other Latin American leaders, including Hugo Chavez in Venezuela.

UK Defence Minister Bill Rammell said the government had a "legitimate right" to build an oil industry in its waters.

As well as the rig, the project also involved the largest consignment of gear to be shipped from Aberdeen – a key port for the North Sea oil and gas industry – to the region. About 9,000 tonnes of equipment was loaded at Aberdeen harbour for shipment to the Falklands.

The new oil well has reached a depth of 3,570 metres and gas has also been discovered, particularly below 3,400m.

Desire has a majority interest in the Liz well. Rockhopper Exploration, which has the remaining 7.5 per cent, saw its shares slump 24 per cent at one point yesterday, before rallying to close down just under 16 per cent.