Premier Oil has committed big money to one of the main Falkland explorers.
Back in May, I took a look at the companies that are exploring for oil in the Falkland Islands, and said that I expected further developments shortly. I'm happy to say that my forecast is coming true -- and the news could be about to get much more exciting.
This morning, Rockhopper Exploration (LSE: RKH) announced that it had agreed a 60% farm-out deal with Premier Oil (LSE: PMO), a £2bn, FTSE 250-listed exploration and production company. The deal is worth $1bn in total to Rockhopper, providing a clear statement of Premier's confidence in Rockhopper's resources.
Rockhopper is exploring the North Falkland Basin and is currently the only company to have found oil (not gas) in the Falkland Islands.
Rockhopper's 2011 Sea Lion find, in which small explorer Desire Petroleum (LSE: DES) also has an interest, contains 355 million barrels of 2C contingent resources: translated, this means that the oil has been discovered but is not yet proven to be commercially viable. The exact amount of oil is a 50% estimate -- so it is equally likely to be more or less than 355 million barrels.
Following its Sea Lion find, Rockhopper could not fund any further development without a substantial partner -- and that's where Premier comes in.
Premier started out as a small oil explorer, but has grown into a successful independent oil production company -- it's a good example of the type of share highlighted in this free Fool report, "Ten Steps To Making A Million In The Market", which I recommend.
Premier will pay Rockhopper $231m on completion of its 60% acquisition of Rockhopper's licence interests. In addition, it will carry $722m of Rockhopper's development costs for Sea Lion, plus $48m of Rockhopper's future exploration costs for other joint ventures between the two.
A 'carry' is when an oil company pays for its partner's costs up front in the expectation of recovering them from future oil and gas sales. So Premier expects to get its $722m back, but there is no guarantee of this.
Not the first
Rockhopper is not the only company to have agreed a farm-out deal for its Falkland interests. Falkland Oil & Gas (LSE: FOGL) has also agreed a deal with Edison International -- even though it has yet to drill a well!
The deal with Edison was agreed in March but was kept under wraps until June for commercial reasons. It gives Edison a 25% interest in some of FOGL's licences and a 12.5% interest in others, with Edison paying its share of drilling costs and some additional expenses.
Drilling results due soon
The next major news should be the results of the second well being drilled by Borders & Southern Petroleum (LSE: BOR), which is operating in the highly prospective Southern Falkland Basin alongside FOGL.
Borders' first well, Darwin, contained gas, but not oil, raising concerns over whether it would be commercially viable. Hopes will be high that the second well, Stebbing, will either contain a lot of gas, or better still, oil, which will increase the chance of the finds being commercially viable.
News from Stebbing is expected very soon, after which the drilling platform being used will start on FOGL's first well. This will be in the Loligo prospect, which has mean prospective resources of 4.7 billion barrels of oil -- the biggest prospect in the Falklands.
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> Roland owns shares in Falkland Oil & Gas but does not own any of the other shares mentioned in this article.