The prospect of a new oil boom off the coast of the Falklands Islands has been dealt a heavy blow after the first well yielded disappointing results.
Desire Petroleum told the stock market this morning that exploratory drilling beneath the seabed surrounding the South Atlantic territory had found oil deposits, but warned that early evidence suggests they may not be commercially viable. The bad news sent its shares tumbling more than 50%, and hit other companies in the sector.
A handful of explorers, including Desire, are hoping to discover large quantities of oil in the North Falklands basin. Earlier this year a drilling rig called Ocean Guardian was shipped out from Scotland to dig a series of exploratory wells.
Desire was the first company to put Ocean Guardian to use. It dug more than 3,500 metres, and hit hydrocarbon deposits around 2,550 metres. However, early analysis showed "that oil may be present in thin intervals but that reservoir quality is poor". It warned that until it has analysed the data further it will not know whether the well needs to be "drilled deeper, suspended for testing or plugged and abandoned".
Shares in Desire plunged by nearly 60% when trading began, down 58p at 41p. Rockhopper Exploration, which owned 7% of Desire's well, tumbled 35%.
The offshore drilling had sparked a diplomatic spat between the UK and Argentina, reviving memories of the conflict over the islands in 1982. Last month the Argentinian government issued a decree obliging ships using Argentinian ports to seek a permit if they enter or leave British-controlled waters.
Desire is expected to announce further results from the well, called Liz 14/19-1, later this week.
Alan Sinclair, analyst at stockbrokers Seymour Pierce, argued that all may not be lost.
"On balance, 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. It is encouraging that initial indications suggest that potentially all the ingredients – reservoir, trap and hydrocarbons – are present in the general area," he wrote in a research note.
If subsequent drilling yields the same disappointing results as Desire's first well, then this will be the second time in 13 years that a Falklands oil boom has ended in tears. In May 1998, Desire's shares crashed by 30% after a drilling operation in the North Falklands basin found that hydrocarbons were present, but not in commercial quantities.
