Another Frontier Area May Yield Oil And Gas Riches

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While the Falkland Islands are known mostly for a large population of sheep, this remote area in the south Atlantic is the latest frontier for energy companies exploring for oil and gas resources.  Noble Energy (NYSE: NBL) is one of the operators targeting this area, and has assembled a deep inventory of prospects to help generate long term production and reserve growth for the company.

Exploration Program

Noble Energy devotes a considerable amount of capital and effort on oil and gas exploration and has discovered 2.3 billion barrels of oil equivalent (BOE) of resources over the last five years.  These discoveries were made in the Gulf of Mexico, Africa, the Eastern Mediterranean and other areas of its global portfolio. 

Noble Energy is now prospecting for additional opportunities and is assessing properties in the Eastern Mediterranean, the Falkland Islands, the United States and other areas.

Falkland Islands

Noble Energy has an interest in ten million acres of prospective exploration properties spread across various offshore blocks in the Falkland Islands.  The company farmed into these licenses in August 2012, acquiring a 35% interest in both the Northern and Southern license areas from Falkland Oil and Gas Limited (LSE: FOGL)

Noble Energy is required to pay $25 million and 60% of the cost of the first two wells to earn this ownership share and will become the operator of the two license areas in 2013 and 2014. The company estimates that the top ten prospects across its Falkland Islands acreage has gross mean unrisked resources of 7 billion BOE.

Falkland Oil and Gas Limited reported a discovery at the Loligo prospect in the Falkland Islands in September 2012, finding natural gas pay in several formations.  The company also reported an unsuccessful well at the Toroa prospect in 2010.  Borders & Southern Petroleum plc (LSE: BOR) also reported finding natural gas and liquids at the Darwin well in August 2012.

Scotia Prospect

Falkland Oil and Gas Limited started drilling the Scotia prospect in September 2012 and is targeting a cretaceous oil zone here.  The company estimates that gross mean unrisked resources here may total 845 million BOE, with a range from 145 million to 960 million BOE.  This is risky exploration and Noble Energy assigns only a 30% chance of success in its investment presentation.

Noble Energy estimates that its total net investment in the Falkland Island will range between $180 million and $230 million over the next three years.  If the Scotia prospect is commercially successful, Noble Energy expects first production in 2018 and a peak rate of 50,000 barrels per day by 2020.  The company estimates that full cycle finding and development costs here will be $24 per BOE.  

Geopolitical Angle

There is some geopolitical tension in the area as the Falkland Islands was at the center of a war between Great Britain and Argentina in the early 1980’s.  The archipelago comprise two main islands and hundreds of smaller ones and is currently a British Overseas Territory  

Argentina still claims sovereignty over the islands, which is referred to by the government as Islas Malvinas.  The government has already said that it is considering exploring for oil and gas in the area through YPF SA (NYSE: YPF), which is majority controlled by the Argentinean government.

Argentina is experiencing its own oil and gas boom with many operators exploring and developing the Vaca Muerta Shale. Chevron Corporation (NYSE: CVX) recently signed an agreement with YPF to jointly develop this onshore formation. The company plans to drill more than 100 wells here over the next three years.

Apache Corporation (NYSE: APA) has made considerable investments in Argentina and has 450,000 net acres exposed to the Vaca Muerta Shale. The company estimates that it has 800 million barrels of oil of resource potential here and spud its first horizontal well in August 2012.  Apache Corporation also has producing natural gas properties in Argentina and reported production of 97 million cubic feet per day in the second quarter of 2012.

Noble Energy is an active explorer for oil and gas resources across its global portfolio and has many promising prospects across millions of acres in the Falkland Islands.  Although some investors may feel this exploration is too risky, it is needed to grow the company and will pay off in the long term. 

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