Falklands oil bonanza hopes revived while price climbs again

Hopes of an oil bonanza in the Falkland Islands have been revived after a positive update from Rockhopper Exploration, one of the many UK companies drilling in the area. The news came as the price of crude continued to rise thanks to the military action in Libya and strong demand for hydrocarbons from Japan.

Results from the Falklands – whose ownership is still disputed by Argentina – have been mixed, the most notable recent setback being Desire Petroleum's decision in January to abandon a key well after failing to find oil.

But on Monday Rockhopper said an appraisal well at its Sea Lion discovery area had discovered enough evidence of oil to suggest it was commercially viable. The rig involved in the testing, the Ocean Guardian, will now move to drill Desire's Ninky prospect, where Rockhopper has a 7.5% interest, before coming back to Sea Lion for more appraisal wells. The news sent Rockhopper's shares soaring 70.75p to 287.75p, a 33% increase, while other explorers in the area also benefited. Desire climbed 3.25p to 40p, Argos Resources added 1.75p to 34.75p and Falkland Oil & Gas rose 0.5p to 80p.

Charlie Sharp, an analyst at Matrix, said: "This was a crunch well for Rockhopper; failure would have raised enormous questions about the viability of the Sea Lion discovery. But the result appears to have matched or beaten expectations, raising the likelihood of a commercial development. There are still significant obstacles related to the scale of project, the need for a partner (greater reserves and preferably another field would be helpful), infrastructure and political issues. However, [now] the story looks back on track."

Meanwhile Brent crude climbed nearly $1.50 to $115.50 a barrel by the time London's equity market closed, following the Operation Odyssey Dawn attacks in Libya. Analysts predicted that the strikes against Colonel Gaddafi could push oil above its recent highs, with Brent tipped to break through $120 a barrel.

"The sell-off in the oil price on Friday afternoon proved to be short-lived with the events in the Middle East over the weekend lifting oil back to its recent highs," said Jane Foley, senior strategist at Rabobank.

The oil price has been unsettled in recent weeks. Brent broke through $100 a barrel in early February as the Egyptian uprising took hold. The Libyan conflict has added to the pressure, with the International Energy Agency predicting that the country's oil output will be severely curtailed for some time.

Libya is one of the largest oil producers in the region, but production had already almost stopped. Military operations in the region could also hamper supplies from other countries. But some analysts are confident that Saudi Arabia can increase production to compensate.

Mike Wittner, head of commodities research at Société Générale, said oil traders were trying to calculate how long Libyan production could be offline. "We could end up by having two countries or a protracted civil war," he said.

With Japan's nuclear power industry disrupted by the earthquake and tsunami, the country is now buying more oil to cover its energy gap. Reuters reported that Japan has bought all the available stock of some types of crude oil in the Asian markets, which is expected to push prices higher.

In the UK, the high oil price has led to record petrol prices. Chancellor George Osborne is expected to scrap scheduled increases in fuel duties in the budget, and also freeze air passenger duty.