GlobalData report: Falkland Islands to retain favorable fiscal regime through medium term

Falkland Islands’ attractive fiscal regime with a low government intake is expected to remain stable through the short and medium term, according to a new report from research and consulting firm GlobalData. Although the Falkland Islands’ upstream industry is still in its infancy, oil and gas companies have been attracted by its fiscal regime since it was introduced in 1996. Given that the country’s focus has not yet shifted from promoting exploration, the terms are likely to remain as they are, according to GlobalData.

While the Falkland Islands’ first drilling campaign in 1998 yielded no discoveries, activities in 2010 and beyond have generated increased interest, mainly due to the Sea Lion discovery. “The final investment decision on the Sea Lion Project has now been delayed until 2015, and it is unlikely that detrimental changes would be made to the fiscal terms before any development has proven commercial and production has commenced,” Mike McCormick, GlobalData’s Upstream Analyst for Latin America, said. “This is particularly due to the high exploration costs in the area, as well as uncertainties surrounding the islands’ relationship with Argentina.

“Wells to the north of the islands cost around $50 million to drill, and those to the south and east can cost upwards of $100 million. Many international oil companies that are currently enamored with Argentina’s Vaca Muerta shale prospect will be unable to make investments in the Falklands, out of fear of political and financial repercussions in Argentina.”

GlobalData’s report, “Falkland Islands Upstream Fiscal and Regulatory Report,” stated that operations in the Falkland Islands are likely to remain expensive. Even if the sector undergoes significant growth in the long term, the degree to which terms could be made more stringent, without damaging the industry, would be limited by the profitability of this activity.

Further, while territorial disputes persist over the islands and their offshore zone with Argentina, favorable fiscal terms in comparison with those of other areas of similar prospectivity are likely to be required to attract investors.

According to GlobalData, the most significant event related to the Falkland Islands’ fiscal and regulatory regime in the medium term could be the government’s decision of when to reopen applications for production licenses, since large areas of the offshore area remain unlicensed.

“It is likely that the application process will be reopened if news from the current licenses generates significant interest, but this will depend on the results of drilling programs, such as that expected in early 2015,” Will Scargill, Upstream Fiscal Analyst for GlobalData, said. “The long run could bring tougher fiscal terms if the sector undergoes substantial growth, but even then the regime is likely to remain comparatively attractive for its level of hydrocarbon potential.”