On August 23, Borders & Southern (BDRSF.PK) released results of its fluid analysis on the Darwin discovery. You can read the press release here. The results are a 46-49 degree condensate with a mean recoverable volume of 190 million barrels. BOR has also mentioned that a seismic program will be initiated starting in 2013 and future drilling will realistically take place in 2014. BOR is fully funded for the seismic; however, it will be required to raise funds to drill. BOR stock in London is up roughly 37% on the Darwin news.
Is a 190 million barrel condensate find in deep water at the ends of the world truly going to be commercial?
First, the size of the prospect is relatively small given its location. The Falkland Islands are one of the most remote places on the planet. Darwin is in over 2,000 meters of water. Contrast that to Rockhopper's Sea Lion find, which sits in 400m of water. The seas are also much calmer on the North side of the island, with the Southern area closely resembling the North Sea. The technological complexities between these water depths is very significant.
Any partner coming in is obviously going to have less than 100% of the 190MM bbls. Rockhopper had to cut a very unfavorable deal in order to find a partner to develop Sea Lion. Premier took 60% of Rockhopper's Sea Lion find, which, in total, was around 350MM recoverable barrels of oil. Borders is probably going to have to give up a similar portion or more, given the challenges with developing Darwin. If they give up 50%, the partner is going after 95MM bbls. Who is going to bring their operations to the extreme deepwaters of the remote Falkland Islands to develop 95MM bbls of condensate? Field development costs are going to be significant as well, due to the water depth, remote location, and the need for reinjecting gas for pressure maintenance. Something can be stated as commercial on paper, however, getting someone to act on it can be a different thing, given the intangibles you can't present on a piece of paper. Keep in mind Darwin hasn't even been appraised yet. BOR has a single well down. Sea Lion had a full appraisal done before the Premier farm-in. This only adds to the uncertainty of the economics for a potential partner.
I think the future of Darwin is heavily tied to the success or failure of the wells Falkland Oil and Gas (FLKOF.PK) are slated to drill this year. FOGL's massive prospects have already attracted two large industry players even without drilling a single well. If FOGL discovers significant hydrocarbons, it will turn the Falkland Islands into an oil boom that I think would give BOR the synergy it needs to attract an industry partner to develop Darwin. Any partner farming in with BOR after a discovery would be able to take advantage of the economies of scale that are going to come with a FOGL discovery, especially if FOGL finds any significant gas.
Future adjacent discoveries by BOR could also help push Darwin to true commerciality, even without FOGL finding something. Although, if FOGL comes up dry, it may be hard to attract partners to continue exploration in the general Falklands area. How hard will it be to find a partner willing to take on a relatively mediocre Darwin in a very challenging environment and continue needed exploration to try and make the project big enough to be worth it? If BOR can't find a partner, lots of capital will need to be raised through stock dilution to fund further exploration and appraisal of Darwin.
I have had BOR shares since after the Darwin discovery and sold them today after the jump in share price. The share price over the past few days shows the news obviously leaked out before the official announcement. I felt like today was a sell the news event with much still uncertain about the Darwin area and the size not being that large. I still hold my FOGL shares as I believe they are the true key to turning the Falkland Islands into an oil province. FOGL has almost four billion net BOE prospective resources in their first two wells along with having two large energy companies as partners already. Of course, this is the oil and gas industry and wild things happen, so there is a definite possibility I will eat crow on this, but with BOR so dependent on FOGL results, I think I would rather invest money in FOGL for a much better risk reward situation.
Disclosure: I am long FLKOF.PK.
Additional disclosure: Long FOGL and FLKOF