Desire's Investors Told to Hang In There

By J. Brock (FINN)

CP The reason basically is that during those three years, there hasn’t been any activity here in the Falklands on the oil side. That doesn’t mean to say that we haven’t been extremely active in trying to get drilling started again in the Falklands. To do that, of course, we have had to be doing a lot of technical work and we have also been visiting many companies. Indeed, all of our activity, really, has been outside of the Falklands in this period. But we’ve kept in very close contact with particularly Phyl Rendell at the Department of Mineral Resources and Dr. Phil Richards, who is the British Geological Survey advisor to the Department. And, we have done a number of joint things with the Department. For instance, last year, we went to a joint conference – a convention in Huston (USA) with them where we met a lot of companies. So, we are working very closely and very hard. The reason I have come this time is partly because not having been for a while, I did feel that it was time that I came and waved the flag again. Also, there’s a new Governor – there are also going to be a number of other new positions. And, although I have met some of the people, including the new Governor, before, it did seem a good opportunity to come to the Islands and to have a series of meetings at which we examine where we are in the oil business and what our next steps ought to be. For me, it’s an opportunity to see everybody at the same time. And, I think we’ve reached a relatively critical time as far as oil development is concerned.

CP: We want to bring a rig from somewhere closer than the North Sea. The biggest single cost of the last drilling campaign was actually bringing the rig down. It cost $42 Million to bring it in and take it out – without it doing anything – without drilling a hole. One of the reasons that happened was because when the Mineral Resources Department was just beginning, they very much followed North Sea regulations. So, they wanted to have a rig, which has a "North Sea Safety Case." That means that all the health and safety issues on the rig were approved by the UK Government – HSE – in Aberdeen. Now, to drill again, particularly in the current climate, we really can’t afford those sorts of sums money on just bringing the rig in. So, clearly we want to get a rig that is closer. That means we’ve also got to get a rig which has a health and safety case, which is similar, if not identical, to the Borgny Dolphin. We have spent quite a bit of time talking to the HSE in Aberdeen and to the Department here about how we can best do that. So, Brazil is now probably the most logical place to bring the rig because there are a lot of rigs working offshore Brazil. But we couldn’t bring one in until we had a resolution of this problem. I am not saying that’s not why we didn’t bring the rig in but we won’t be able to bring a rig in from Brazil unless everybody is happy with its safety case. But I think we are just about cracking that now.

CP: The work that we have done with the first six wells that we drilled – and I ought to stress that in the North sea, it took anything from – depending who you speak to – anything from 11 to 19 wells before the first major discovery was made. The six wells aren’t very many. What we have had to do is to analyse all of the data from those six wells to try and better understand two things. One is why we were not successful first time in finding commercial quantities of oil and secondly, where we could find it if we drill again. Two major things have come out of that study. One is that it is, indeed, an oil province. I mean, there’s a lot of oil out there. And, there is a very, very rich source rock and there is no doubt that it is a very prospective basin for oil. The second thing that has come out is that the source rock is so thick that it has, in fact, produced a kind of seal – almost like a big cork – over the whole of the basin. And, the oil hasn’t managed to get above it. It’s all been kept below it. Where we were drilling before, we were actually looking for oil above it. Although we found some, not very much had got out. The next programme is to drill below the source rock. And, all the work we have been doing is to identify objectives that are below the source rock that we can drill next time. We have managed to identify ten or eleven very, very good looking prospects. But I must stress that they are untested. Nobody’s drilled them yet.

CP: Not greatly. Drilling in the North Falkland Basin turned out to be very easy and very quick. The wells we drilled were relatively quick and we drilled them with a lot more precaution than we would necessarily drill now. But we know a lot more about it. You can probably drill for 10,000 feet or 12,000 feet, certainly in three weeks in the North Falkland Basin and possibly even less. So, that’s not a real problem. It’s deeper but it’s not that much deeper. Really, we are talking about another two or three days drilling per well, so nothing serious.

We are back – not exactly quite where we were when we started – we have obviously got a lot more information than when we started. But even so, drilling where we are planning to drill, is very much a "wild-cat" exploration. The other problem that we’ve got – this has been one of the main problems in achieving farm-out or bringing in partners – is that if you are going to spend even $10 Million bringing a rig in and taking it out, you don’t want to do that for just one well. We think we can drill a well out there, probably for about $5 Million or $6 Million. So it would actually cost more to bring the rig in than it would to drill the well. Because of that, what we want to do is drill at least three wells. Now if we were farming it out in the North Sea where there were lots of rigs, there would be no problem. We could do it for just one well, or one at a time. And, we might have different oil companies involved in each well. But here you really do have to justify drilling three wells. Farming out three wells is rather more difficult than farming out one. That’s been one of the problems that we’ve had.

CP: What happens when you explore for oil is that the exploration wells you drill – because of all the work you have to do on them, are generally not very suited to be production wells. So, it’s quite common not really to cap them but to abandon them. This is quite common in the North Sea as well. I am not saying we will do that here. It is more likely that we will keep the well rather than abandon it. But it’s quite common to abandon exploration wells because they are frequently not in the right position anyway, to develop the field. And you want to plan the development of the field with the optimum number of wells. My guess is, because of the costs out here, that we will actually retain any well that we drill and we won’t abandon them if they are successful. We will keep them as potential producers.

Between actually making the discovery and bringing the field into production – in this part of the world you are looking at anything from 3 to 5 years to accomplish that – between 3 and 5 years before the first oil came in. Of course, it would be known by that time that we had found the oil and it would be very valuable. It certainly would be very valuable to a Desire Shareholder. We’d have to publish that information straight away.

CP: It’s more a function of which companies are involved. If those companies have got lots of oil being produced, they may wish to delay it. But if it’s a company that’s keen to produce oil, irrespective of how much the rest of the world is producing, they will want to get right on with it. And, most of the companies that will come down here to drill will be companies that wish to develop quickly. So, I wouldn’t expect there to be a delay. Now, there could be delays if the oil price fell or something of that sort but I think the way the oil business is going – the companies and, indeed, governments – are getting very concerned about some of the political problems in a lot of the world’s oil producing countries. Now, this is a very stable political environment here, so there would be a lot of incentive, if oil were found here, to develop it.

CP: It depends on how much you find. It’s often said that the whole of the North Sea, including UK, Norway, and the Dutch sector – that all the oil found there would last the world about two years. So, if we were to find, perhaps a quarter of that here, which would be extremely nice, it would last the world six months. We are not going to produce it in six months. It will be produced over something like 25 years. So, it’s not going to make a huge impact on the world reserves. That said, all the oil we find adds to the overall world reserve. And, the more of it that is in politically stable areas, the better, frankly, for the West. Western governments, particularly European and the United States, will be anxious to find more oil in areas which they regard as politically stable. And, I think this is a politically stable area.

CP: I don’t have any safeguards. I would be very upset if that happened because my family company is the biggest shareholder. I have very much a vested interest in seeing that it doesn’t happen. It is the case that in some areas, it takes a long time to find oil and that the first people who come in are not successful. I can’t say that it won’t happen here but with modern technology, I think that we are in a position where we can certainly give it a very, very good shot to find oil. I am confident that there is oil to be found. What I can’t say off the top of my head is that it will happen in one well or 10 wells or that it will happen this year or in three years’ time. I don’t know. I would think, eventually, oil will be found in the North Falkland Basin. I just hope that I am the one who finds it and that I find it soon.

CP: I think so. Most of the people who invested in Desire knew it was an exploration risk. The share price is very volatile. Those people who came in on Day One, I think, have still got their money, even at the current share price. There are others who bought when the share price went very high and they lost money. That is the way, I am afraid, that shares like Desire go. If we start to drill again, it will have an affect on the share price. If we are successful, it will have a very big affect on the share price. It depends what you want to do with your money. I have said this before. Nobody should be putting their life savings into Desire. But if you want to put some money somewhere, with the opportunity for a major multiplier, and, I mean, 10 or 20 times your money, Desire is as good a bet as the 2:30 at Epsom – a better bet than the 2:30 at Epsom.