LONDON Oil group Rockhopper Exploration Plc (RKH.L) unveiled plans for a $2 billion (1.3 billion pound) investment in the Falkland Islands, a move which could transform the remote territory into a major oil production centre.
The emergence of the British-governed territory as an oil producer will likely stoke tensions with Argentina, which 30 years ago fought a war against Britain for control of the islands over which it still claims sovereignty.
Rockhopper said on Wednesday it expected to start pumping oil in 2016 from the Sea Lion discovery made in 2010 and production would ramp up to a maximum of around 120,000 barrels of oil per day by 2018.
Following the initial find made by the company in 2010, analysts questioned whether there was sufficient viable oil to justify investment in infrastructure in the South Atlantic.
Argentina said last year boats sailing from its ports to the Falklands would need a government permit, potentially complicating the prospects for development. Friction resurfaced in June when Britain refused to hold talks over the islands.
Rockhopper said its reserves, which it estimated at around 350 million barrels of recoverable oil, were large enough for a development, having spent recent months drilling a series of appraisal wells to establish the size of the oil field.
The company has not yet said how it plans to fund the project, which analysts said was playing on the shares.
"The uncertainty over near-term funding requirements and financing and farm-out options are clearly offsetting a positive and credible message on the geology and development options and impacting the shares," said RBS analyst Phil Corbett.
Rockhopper traded down 2.3 percent to 240 pence at 3:01 p.m., underperforming the European index of oil and gas companies .SXEP which was 1.6 percent higher.
Analysts expect the company to look to partner with another oil company which would in return help fund the project.
One of the world's largest oil companies, however, has said in the past the Falklands were not attractive.
A U.S. diplomatic cable leaked in 2010 quoted a senior executive of ExxonMobil (XOM.N) as saying he believed resources in the islands were not sufficient to be profitable.
However, Corbett believes there would be significant interest in partnering with Rockhopper, from national oil companies as well as large and small independent firms.
"Concern over the political angle might linger for a while yet, but how many opportunities are out there at the moment of this scale for companies to get involved in?" he asked.
Further positive drilling results, also announced on Wednesday could push Rockhopper's reserves higher, increasing the attractiveness of partnering with the company.
In presentations to investors and analysts on Wednesday, Rockhopper emphasised that the location of the Falklands was not considered difficult for development, noting that the drilling campaign had been solely supplied by support vessels from the UK, avoiding Argentina.
Shares in other British explorers with exploration acreage in the Falklands also gained with Desire Petroleum DES.L up 2.5 percent, Borders & Southern (BSTH.L) up 1.5 percent and Argos Resources (ARGR.L) up 2.2 percent.
(Editing by Dan Lalor and Mike Nesbit)