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Former Secretary of State Alexander Haig died Saturday. There were many successes in his life, but one failure was his bid to avert the conflict in the Falkland Islands between Argentina and Britain.

The war ended in June of '82, but the conflict lives on. This week, tensions began escalating again. This time over oil.

Estimates of recoverable oil around the islands vary from zero to 60 billion barrels. By some estimates, this oil could be Britain's new North Sea which, If it turned out to be true, could transform the nation's prospects.

After having exported North Sea oil since the 1960s, Britain has recently flipped from being an oil exporter to a net oil importer. As North Sea production declines further, the effect on the UK's already damaged finances could be harsh. Unlike Norway, Britain did little to invest its oil wealth for the future.

The recovery of significant oil in the south Atlantic could be a huge boost for Britain, but many issues remain. Not least, the question of how much oil there is and how much is recoverable. These questions may soon start to get answers.



As reported in the Telegraph, drilling has begun amid protests from Argentina. Small British company Desire Petroleum has started exploratory drilling with
its Ocean Guardian platform on the Liz prospect in the North Falkland Basin. Its partner Rockhopper Exploration has also been allocated two slots to drill its Sea Lion and Ernest prospects.

In a sign of the difficulties involved in the work, the rig had to be towed 8,000 miles from the North Sea to the South Atlantic. The remoteness of the location adds to the costs. It will also add to the difficulty of recovery, with no local infrastructure to leverage. Gas, in particular, would require significant investment to commercialize. Add in the difficulties of working in deep water and wild seas and it is clear why little has been done to date to develop the region.

Over in the South and East Falklands Basins, even deeper waters, wilder seas and bigger prospects lie in wait. These are covered by licenses owned by Falkland Oil and Gas and its partner BHP Billiton (NYSE:BHP).

If the recoverable oil is as significant as hoped, it would be a bonanza for the islands. Every time activity increases, there is excited talk of the islanders becoming the richest in the world. No doubt, production of oil and gas would lead to a boom in all sorts of activity on the islands. That is one reason why Falklands Islands Holdings looks attractive. Apart from a 14.6% stake in Falkland Oil and Gas, it owns many interests on the islands including most of the retail properties, land around the airport and deep water frontage. Meanwhile, the company generates plenty of cash from its other businesses in Britain.

But even if commercial oil is found and production difficulties are overcome, the issues with Argentina will not go away. As reported in the Economist Argentina has many reasons for putting pressure on Britain and the islands. Diplomatic pressure has been accompanied by attempts to obstruct shipping and economic activity. The end game for Argentina is probably some settlement on mineral rights, but domestic politics will always make the Malvinas a sensitive and dangerous issue.

In Britain, they have certainly noticed the increase in temperature. They have responded with some diplomatic warnings of their own. The Defense Minister Bill Rammell told the House of Commons: "We will take whatever steps are necessary to protect the Falkland Islands and our counterparts in Argentina are aware of that."

Islanders, stock owners and governments will be anxiously watching for developments in this story. For all those involved, the stakes are high.

Disclosure: Long BHP and Falklands Islands Holdings

Source: Falklands Oil: High Stakes in the South Atlantic