When UK oil exploration company Desire Petroleum commenced drilling off the North Falkland basin in February 2010, the move reignited political tensions between the UK and Argentina that have lain quietly smouldering since the 1980s war over the South Atlantic archipelago.

In March, Desire’s results showed only small quantities of low quality oil. However, any discouragement Desire may have caused for investors in the four British companies drilling in the area was swept away by rival exploration company Rockhopper’s announcement on 7 May that it had struck black gold at its Sea Lion drilling site.

This 53m-thick layer of mobile crude oil, found 220km (135 miles) north of the islands, is free of both water and sand content and could produce millions of barrels of oil worth billions of pounds – a rich prize for the citizens of the Falklands, who could become the world’s richest energy producers, outstripping even oil-saturated Abu Dhabi and Brunei on an income-per-capita basis.

Two other UK listed companies are currently drilling or planning to drill for oil in the waters around the Falklands – Falklands Oil & Gas and Borders & Southern.

“The best possible outcome would see the UK and Argentina working together jointly to develop any oil finds.”

Analysts estimate that the Falkland’s northern basin could contain several billion barrels of oil and a number of more optimistic geological surveys have suggested that as many as 60 billion barrels may lie beneath the seabed. Until Desire’s rig Ocean Guardian started exploration work in February, no wells had been drilled around the islands since 1998.

Falklands oil – no longer the “golden comb”?

Likening Argentina and the UK to “two bald men fighting over a comb”, Argentine writer Jorge Luis Borges put the 170-year old squabble over sovereignty of the remote, windswept islands down to petty political manoeuvering and echoes of residual imperialism.

With the Rockhopper find gilding the proverbial comb, however, it looks as if the two bald men suddenly have something worth fighting over.

Rockhopper managing director Sam Moody says the Sea Lion discovery is: "a high-quality reservoir interval".

"This increases the likelihood that we will return to this well later during the campaign to carry out a flow test," Moody says. All current indications are that the oil recovered from the Sea Lion well is moveable, he adds.

The UK Government, quite possibly preoccupied by the general election that was taking place as Rockhopper’s results were announced, has remained stoic on the subject. When exploration plans were first announced, however, UK defence minister Bill Rammell said the government had a "legitimate right" to build an oil industry in its waters.

Argentine geologist and independent offshore expert Carlos Urien says the islanders had been eyeing the development of oil projects in the area for almost 30 years.

"The Falklands administration has put a lot of effort into promoting drilling in the Falklands and making it an attractive proposition," says Urien.

Argentina’s reaction to the find has been more energetic, with Foreign Minister Jorge Taiana pleading with the UN to help stop "further unilateral acts" by the UK.

In response to the Rockhopper find, Taiana said in a statement that Argentina would take "all the necessary measures within international law to stop these illegal actions".

Durham University has produced a map of the disputed area showing where the two country’s claims overlap. International Boundaries Research Unit director of research Martin Pratt says Argentine petitions over the sovereignty of the region were likely to receive short shrift from the UK Government.

"The UK says there is no Argentine sovereignty there to negotiate with," says Pratt. "Sovereignty is such a sensitive thing politically that I am sure tensions will resurface. It comes up in cyclical bursts and given that the islands are so symbolic to the Argentines I would not be surprised if the situation became increasingly strained ahead of next year’s Argentine presidential elections."

Solving the Falklands infrastructure conundrum

Stirring up nationalist fervour, Argentine President Christina Fernandez de Kirchner passed a law claiming ownership of the Falklands and several other UK overseas territories including South Georgia and the Sandwich Islands in December 2009. She followed this up with a decree in February 2010 saying that all vessels travelling between Argentina and the Falklands, or those travelling through Argentine waters en-route to the islands, must seek prior permission from the government.

The Kirchner administration has not proved a friend to foreign infrastructure investment and reprisal of the row over sovereignty of the islands signals that the government is not likely to embrace any companies looking to provide the infrastructure that could help make further finds in the area viable.

"The South Atlantic is not like Kuwait or the North Sea," Urien says. "A lot of money needs to be put into infrastructure before any project could become commercially viable. It’s not only a question of infrastructure, there’s a logistical problem as well. Argentina is the closest country to the islands but it no longer has a pool of offshore experts or the capability to produce land towers and semi submersibles.

"It looks like the best possible outcome would see the UK and Argentina working together jointly to develop any oil finds around the North Falkland basin. There is a precedent for this already in the energy sector in the partnership between Argentine gas giant Brindas and BP."

“With tensions between the two countries riding high, the possibility of a joint venture between Argentina and the UK looks increasingly unlikely.”

Argentine energy trader Andres Braconi says that while oil majors Total and Petrobras are well placed to contribute to the development of infrastructure and distribution networks for any commercially viable project around the islands, in the current political climate any moves to do so would be “suicide” on their part. "Companies like Petrobras and Total could potentially have a great deal of interest in a major Falklands oil discovery," said Braconi. "However, they both have considerable business interests in Argentina and to even talk about going over to the Falklands and engaging with UK companies would be deadly to their interests in this country."

Argentina’s highly successful neighbour Brazil can attribute much of its present wealth to the state oil company Petrobras, which doggedly explored potential oil fields off its shores when its international counterparts had given up.

In the 1990s the UK was looking to join forces with Argentina in the development of whatever the resource-rich waters between the islands and the South American mainland might yield. Many assumed the Argentine mainland would be the natural home for any port destined to serve a fully fledged operation in the Falkland basin. With current tensions between the two countries riding high, the possibility of a joint venture between Argentina and the UK looks increasingly unlikely, meaning that companies looking to develop finds in the Falklands will have to look further afield for spots to develop a mainland base.

Urien argues that the only way for Argentina to protect its interests in the region would be the move exploration operations out to around the basin itself.

"We should ring the exclusion zone with Argentine drilling platforms," said Urien. "It is the only way to show that Argentina is really ready to protect its interests. But I don’t think that Argentina has the inclination to do this."