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LONDON (Reuters) - Britain will share in a Falkland Islands windfall when oil starts flowing there later this decade and, with taxes and royalties estimated at up to $167 billion (105.7 billion pounds), the potential prize could inflame mounting tensions with Argentina over sovereignty.
Sea Lion, a field discovered in 2010 north of the islands by explorer Rockhopper, will generate $10.5 billion of tax and royalty revenues for the Falklands over its estimated 20-year life, Edison Investment Research said on Thursday.
That windfall could swell to $167 billion over the years, Edison analysts said, if four wells being drilled this year off the southern coast and targeting 8 billion barrels of oil resources come in as hoped -- the chances of success at these wells are 10-25 percent, analysts have said.
When oil starts flowing, and in whatever quantity, the Falkland Islands will contribute to the cost of its defence, which is currently paid for entirely by Britain, local assembly member Gavin Short told Reuters in a telephone interview.
"We have always said once we have found out what we have got and it started flowing, then it would be our intention to make contributions (to Britain)," Short said on Thursday.
Under licences signed by the oil companies, all proceeds from the oil will flow to the Falkland Islands Government, Short and the Foreign Office both told Reuters.
Edison's estimates came with the islands back in focus two months ahead of the 30th anniversary of a 1982 war that resulted from Argentina's invasion of the islands, which it calls the Malvinas. The conflict claimed 900 lives.
Britain has since refused to start talks over sovereignty unless the overwhelmingly pro-British islanders want them.
Earlier this month, Argentina asked the United Nations for help to stop what it said was Britain's militarisation of the South Atlantic -- a warship has been sent there and politicians are due to visit, although no date has been set.
Also, Prince William, a helicopter pilot in the Royal Air Force, arrived in the islands for a posting earlier this month.
Any extra income of the size suggested by Edison would revolutionise the lives of the 3,000 inhabitants of the group of islands, whose government received 42.4 million pounds total revenue in 2009/10, primarily from fishing.
Contribution to the costs of defending the islands would be welcomed by Britain, which wants to cut defence spending 8 percent over the next four years as it struggles to cut debt.
Rockhopper has been seeking a partner to invest in the $2 billion Sea Lion project to get oil flowing by 2016.
Borders & Southern and Falkland Oil & Gas are both set to drill wells to the south of the islands later this year.
In 1994, the Falklands wrote to Britain offering to pay a proportion of any potential oil revenues towards the cost of defence, known as the "Battle Day Letter." That intention has been reiterated by the Falkland Islands assembly members since, a spokesman for the Foreign Office said.
The estimate of $167 billion compares with total tax revenue in Argentina of around $125 billion last year.
"Tensions are already high enough based purely on the symbolic nature of the dispute. When you add in the economic factor, that just will just raise tensions even more," said Mark Jones, Latin American specialist, and chair of the department of political science at Rice University in the United States.
"The potential of loss of revenue form the Falklands is particularly poignant given that Argentina just over the past year and a half has gone from the status of net hydrocarbon exporter to net hydrocarbon importer so they are even more sensitive to this issue than they might have been."
Islanders themselves are containing their excitement until oil starts to flow, aware that exploration is a high risk business, Short said.
"People down here dream a little about the things you could do. But no one is really getting excited. We are sort of being very pragmatic about it and just taking it a step at a time and keeping our feet on the ground," Short said.
"These are just numbers and speculation of what might be down there. Oil is finite. So we are going to have to set up sovereign wealth funds to look after people long after we and the oil are gone."
Additional reporting by Tom Bergin and Rosalba O'Brien; Editing by Paul Hoskins and Dan Lalor