Falkland Oil & Gas Ltd. (FOGL)’s discovery of natural gas off the namesake South Atlantic islands shows investors are betting that demand for the fuel will increase enough to develop finds in the remotest corners of the planet.
Shares of the 247 million-pound ($400 million) explorer gained 5.3 percent yesterday even after the company found gas- bearing rock at the Loligo well, rather than its target of crude oil that can be easily exported worldwide. Gas requires pipelines or multibillion-dollar factories to allow exports.
The gas find is the second this year off the archipelago that Margaret Thatcher went to war to keep British in 1982 and that Argentine President Cristina Fernandez de Kirchner still claims for her country. Falkland Oil said last year that a gas discovery at Loligo may contain as much as 25 trillion cubic feet, enough to build a liquefied natural gas terminal on the Falkland Islands to export to markets in Asia and Europe.
“It’s possible there could be enough gas in a number of accumulations to make an LNG plant imaginable in the long haul,” said Charlie Sharp, an analyst at Canaccord Genuity Securities Ltd. in London. “It certainly would be the furthest from a natural market I can think of.”
The Falkland Islands are 11,000 miles (17,800 kilometers) from Japan, the biggest LNG importer, and 8,000 miles from the U.K., the largest buyer in Europe. By comparison, Japan’s biggest supplier of LNG last year, Malaysia, is less than 3,000 miles away. Qatar, the U.K.’s top supplier, is about 3,300 miles from Britain.
Loligo, located to the east of the islands and named after a Patagonian squid, was targeting as much as 4.7 billion barrels of oil, making it the second-most prospective well drilled in the world this year, according to Morgan Stanley. Borders & Southern Petroleum Plc (BOR) in July also found gas in waters south of the islands.
While U.S. gas prices have plummeted to decade-lows, demand in other parts of the world is booming. Japan’s plan to eliminate nuclear power in the wake of the Fukushima disaster last year will raise imports of LNG by as much as 16 percent in the next eight years, according to Arctic Securities ASA.
Global LNG trade climbed 10 percent last year, according to BP Plc (BP/)’s Statistical Review of World Energy, and the biggest growth was in Japan and the U.K. The world’s energy demand will jump 39 percent in the next 20 years as growth in developing economies accelerates, BP said in January.
The price of imported LNG to Japan has climbed 8.5 percent this year to $18.07 per million British thermal units, according to data complied by Bloomberg.
“Clearly they’d prefer to find oil,” said Laura Loppacher, an analyst at Jefferies International Ltd. in London. “The key is that it’s potentially a very large volume of gas. Particularly since Fukushima, LNG has an incredibly strong market. It’s a question of whether this remote an installation is feasible.”
Falkland Oil said in an investor presentation last November that Loligo still has a strong commercial case if it’s a gas discovery. It would require an LNG terminal to be build onshore on the eastern side of the islands with an export capacity of about 7 million tons a year, equivalent to a quarter of the U.K.’s imports. Floating LNG production vessels may also be viable for smaller discoveries, it said in the presentation on its website.
The prospect of a new oil and gas province opening in the South Atlantic prompted Argentina to warn that it considers exploration off the Falkland Islands illegal. It won’t allow ships from the Falkland Islands into its ports, meaning that all supplies to develop and maintain an oil and gas industry may have to come from Europe or the U.S.
Still, the political tensions are worth the risks for some oil and gas companies. Falkland Oil found partners this year in Noble Energy Inc. (NBL) and Edison SpA, a unit of France’s Electricite de France SA. They will now move onto the Scotia well, where they’re targeting about 1 billion barrels of oil.
Borders & Southern last month estimated that its Darwin discovery may yield about 190 million barrels of gas condensate, a light crude oil produced in association with gas. In 2010, Rockhopper Exploration Plc (RKH) made the region’s first potentially commercial oil discovery to the north of the islands.
Premier Oil Plc (PMO) said it will buy 60 percent of Rockhopper Exploration Plc’s Falkland assets and that it plans to invest $2 billion to produce the Falkland Islands’ first oil.
To contact the reporter on this story: Brian Swint in London at firstname.lastname@example.org