Falklands-Malvinas Forum

Oil Strategy

Oil Development Strategies for the Falkland Islands

In June 1994 the consulting firm Environmental Resources Management, at 8 Cavendish Square, W1M 0ER, London, U. K., delivered the following report to the Falkland Islands Government, who took care of its publication. Reproduced here are pages i-iv and 1-3, and the Final Conclusions.

CONTENTS

1 INTRODUCTI0N 1

1.1 BACKGROUND AND OBJECTIVES 1
1.2 THE EXISTING SITUATION IN THE FALKLAND ISLANDS 1
1.3 THE OIL STORY TO DATE 3
1.4 FACILITIES SUITABLE FOR OIL DEVELOPMENT 4
1.5 REPORT LAYOUT 6

2 LIKELY FUTURE OUTCOMES 7

2.1 TIMESCALE 7
2.2 KEY ACTIVITIES INVOLVED IN OIL DEVELOPMENT 9
2.3 POTENTIAL ENVIRONMENTAL AND SOCIO-ECONOMIC IMPACTS 22
2.4 SUMMARY AND CONCLUSIONS 29

3 KEY DECISION POINTS 33

3.1 INTRODUCTION 33
3.2 LICENSING AND PERMITTING PROCEDURES 35
3.3 POLICY TOWARDS OIL COMPANIES 36
3.4 LOCATION OF SUPPLY BASES AND ADMINISTRATION 38
3.5 CHOICE OF TECHNOLOGY 38
3.6 SUMMARY 39

4 MINIMUM IMPACT SCENARIO 43

4.1 KEY FEATURES 43
4.2 SCALE OF IMPACT 47

5 MAXIMUM IMPACT SCENARIO 49

5.1 KEY FEATURES 49
5.2 SCALE OF IMPACTS 53

6 MIDDLE COURSE SCENARIO 55

6.1 KEY FEATURES 55
6.2 SCALE OF IMPACT 58

7 ENVIRONMENTAL PROTECTION 61

7.1 INTRODUCTION 61
7.2 STRATEGIC PLANNING FOR ENVIRONMENTAL PROTECTION 61
73 LEGISLATION AND PLANNING CONTROLS 66
7.4 ENVIRONMENTAL MANAGEMENT SYSTEMS 70
7.5 OIL SPILL PREVENTION 71
7.6 CONCLUSIONS 73

EXECUTIVE SUMMARY

This report seeks to explore the impacts which the development of an oil extraction industry might have on the Falkland Islands and its society. We are not even at the dawn of this possible new era and the uncertainties still loom large.

* It is not yet certain whether any oil exists beneath the seabed around the Islands.

* If it does exist we do not know whether it will be in exploitable quantities or qualities.

* If it is of exploitable quantity or quality, we do not know whether the international oil market conditions will make exploitation commercially feasible now or for many years to come.

What is clear though is that sufficient possibility exists to make it important, even essential, for the Falkland Islands Government to decide what sort of future industry they would like to see, if it ever emerges, as decisions made now can have consequences for several decades to come. Even more importantly, if these decisions are not taken by FIG they will, by default, be taken by others and in the interests of oil company shareholders rather than those of the Falkland Islands' people.

This report, therefore, explores what kind of future shape the oil industry might have. Some things are relatively clear reflecting the Falklands' isolated position, sparse population and limited manufacturing base.

--Drilling rigs and production platforms are not going to be fabricated and assembled in the Falkland Islands.
--Oil refining and other processing, other than stabilisation, is equally unlikely to take place on the Islands.

Thus, parallels with Scotland or with the Arabian Gulf are not appropriate.

When considering the shape likely to be taken by the exploration and extraction activities themselves, greater uncertainty prevails. We have tried to illustrate the-se uncertainties by describing three possible 'scenarios", depicting the type of activities which might be based offshore and onshore on the Falklands and the South American mainland, and the likely impacts that they would have.

In the Minimum Impact Scenario drilling and production activities are supported as far as possible from bases sited on the South American mainland, with only limited warehousing, office staff and crew change facilities located on the Islands themselves. This we estimate may create the need for only about 50 direct oil connected personnel based on the Falkland Islands, although about 100 further jobs might be created for Islanders or in-migrants eventually. Oil would be exported either by direct loading of tankers offshore or, if shore-based facilities were seen to be essential, these would be located on the South American mainland and supplied by pipeline, thus reducing the environmental impact on the Falkland Islands to very little.

At the other extreme, the Maximum Impact Scenario envisages all supply bases being located on the Falkland Islands as well as onshore terminal facilities. It is difficult to calculate the likely scale of employment needed to support this kind of scenario, but it would seem likely to be a minimum of 900 additional onshore workers and quite possibly twice as many as this. Clearly the impact of such an influx of people would be immense and incalculable and the only thing that it would be safe to say is that little of the traditional Falklands society and way of life would be left intact.

We do not feel that either of these scenarios represents an outcome likely to be acceptable to Falkland Islanders in general - the first because of the number of risks, both political and practical; the second because of the scale of the human impact and risk of loss of identity and control - and have thus devised an intermediate, middle course scenario.

In the Middle Course Scenario drilling activities during exploration would initially be largely supported from bases on the South American mainland, with only limited warehousing, office staff and crew change facilities located on the Islands. However, as full production started a greater range of activities would be based in the Falklands, including warehousing, quay facilities and emergency services. Some expansion in the airport and road connections would be required. This we estimate may create the need for about 900 offshore crew, supported directly by some 60 direct oil industry personnel based on the Falkland Islands, with up to a further 300 jobs which might be created for Islanders or in-migrants eventually. While the social and economic impact of this level of influx would still be significant, the real emphasis of this scenario would be on a slow and steady build up to onshore activity, with FIG encouraging oil companies to share facilities - offices, warehousing, infrastructure, recreational facilities - wherever possible.

However, it is the Falkland Islanders who must decide on what path to the future they prefer. But whatever this choice might be it is important that:

---a strategy is decided upon and further elaborated, on the basis of extensive national debate, so as to provide a framework within which all future policy setting and decision making can take place,

---an extensive set of legislative is put in place, both so that the FIG has the wherewithal to enforce policy, once it has made the appropriate decisions, and so that the oil companies can know what sort of world awaits them in the Falkland Islands and can plan accordingly;

---appropriate institutions need to be devised and put in place:

to formulate the details of policy making within the strategy decided upon;
to draw up regulations and planning frameworks; to administer the necessary permitting; and most importantly
to provide the necessary power to ensure that regulations are being obeyed and codes of conduct respected.

To this end we recommend that FIG should focus on carrying out studies and initiating action in five main areas of policy action.

Choice of licensing blocks which combine exciting potential for oil companies, but which maximise opportunities for developing South American supply bases during seismic and exploration phases and provide incentives for infrastructure sharing between oil companies. This would imply.-

* licensing adjacent blocks with a few test blocks in different areas:
* licensing between 10-20% of all blocks in the first round;
* making blocks small enough to offer an interesting diversity to oil companies;
* licensing inshore blocks last to protect wildlife habitats;
* creating buffer zones where detailed seismic survey work is excluded in areas of particular environmental value; and
* where possible, starting with blocks to the West of the Islands to make a South American support base more feasible.

Making sure that an appropriate planning and permitting system (offshore and onshore) is in place from the time that major infrastructure is likely to be introduced implying the need for further studies to identify:

--which of the UK acts and amendments would provide the most simple and streamlined approach for the Falkland Islands; and whether UK legislation could be copied or would need amendment;
--whether clauses for planning gain could be included;
--the relative merits of a zoning approach, with planning restricted to a delimited area where development would be permitted;
-- the manpower and financial implications of preparing legislation and implementing it; the availability of skills locally and preparation of terms of reference for external assistance, if appropriate;
--a timetable for development and implementation of legislation to meet requirements without involving unnecessary expense;
--opportunities for cost recovery.

Making sure that best practice environmental protection and pollution control legislation is in place. This would include:

which environmental standards for oil operation represent the best protection technology applied elsewhere in the world,
how these standards are likely to evolve by the year 2000 -effectively the first date at which oil exploration could possibly start in earnest in the Falkland Islands,
whether adoption of these standards by the Falkland Islands would be considered as too restrictive by the oil industry for offshore operation in a remote area;
what supporting regulations would be required under the oil legislation currently being drafted.

Providing protection for environmentally sensitive areas along the coastline and around the islands of particular wildlife importance. This would imply:

--immediate temporary designation of very sensitive or valued sites, phased to provide protection to shore areas adjacent to blocks licensed in each new round;

--establishment of buffer zones around key islands and sites;

--licensing of blocks close to the shore last;

--further study to identify the priorities of Falkland Islands Conservation, and its resources - particularly skilled manpower - and how this coincides with priorities associated with the first licensing round;

--implementation of baseline studies in collaboration (and with part or complete financing) with oil companies to prepare an inventory of sites and wildlife resources and to identify and delimit sites for long term designation.

Developing close relations with oil companies through negotiation and encouragement of voluntary agreements to develop a code of conduct, reflected in licensing invitations, including.

sharing of equipment, infrastructure and key facilities (such as the oil spill response facility)
contribution to the costs and implementation of environmental studies and surveys;
developing onshore infrastructure (roads, recreational facilities) in keeping with priorities identified by Falkland Islanders;
building permanent housing for shore-based personnel;
establishing a completely self-contained transit base to accommodate and entertain crews while they are waiting for transfer from the rig to the home base via the Falklands;
using local suppliers and contractors for supply of every day goods and services where this is practical without developing over-dependence;
using "best practice" environmental management systems, including the commissioning of EIAs for major offshore developments, even if these are not strictly required by legislation.

In order to develop the necessary planning legislation, set up the instruments for dealing with applications, and gain an understanding of the ecological sensitivity of specific areas, a certain level of investment by FIG will be required with no guaranteed return. It will therefore be important to establish an appropriate fiscal environment which guarantees sufficient revenue to cover additional costs to FIG, but does not discourage the oil industry.

ERM would be happy to participate in assisting FIG to carry out any further studies or assist in preparing terms of reference for implementation of studies.

BACKGROUND AND OBJECTIVES

This report has been prepared by Envirormental Resources Management (ERM) on behalf of the Falkland Islands Government (FIG) to assess a range of different options for the development of oil resources around the islands while minimizing any potential adverse environmental, social and economic impacts of such development The study is intended to identify these impacts, and so far as is possible, propose measures that will be needed to minimise them. The report also highlights the decisions which need to be made by the FIG and additional studies which may be required.

Through desk research and interviews, ERM have reviewed:

the existing environmental and socio-economic situation in the Falkland Islands and to a lesser extent, in mainland South America;

- information available on likely oil reserves; and & the way in which oil companies are likely to develop those reserves.

It is clear from this review that there is very considerable uncertainty about the way in which any future oil developments in the Falkland Islands might proceed. Some of this uncertainty derives from objective factors beyond the control of FIG, such as the extent and quality of the oil resources discovered, the price of oil and cost of exploitation of fields elsewhere in the world, as well as the rate of technological advance within the industry. Some factors are, however, well within the control of FIG and should be issues about which FIG develops a clear policy within an overall strategy. To illustrate the range of these factors, we have outlined three possible scenarios demonstrating how oil development n-Light proceed in the Falklands. These are:

minimal oil company contact with the Islands;
substantial oil company presence and activity on the Islands; and
a gradual and carefully managed increase in oil company activity on the Islands.

1.2 THE EXISTING SITUATION IN THE FALKLAND is

The Falkland Islands are located within 650 km. of the South American coast and 8,000 km from the UK- Historically, the economy had for a long time been dependent upon the production of wool by a handful of large farms. The settlement pattern reflected this, with a series of company owned settlements scattered around the islands. Port Stanley, the only 'town' in country, provided a centre of government, of international trade and some back up services for the farms. Since the conflict with Argentina this picture has changed radically.

The FIG's decision to exploit the fish resources in the waters around the islands has transformed both the economic situation and the population distribution.

At the time of the last census in 1991, the total permanent population was still around 2,000, yet 75% of these now live in Stanley. Camp population has been declining for a long period, influenced both by the break-up of the large farms and the worldwide decline in demand for wool. This decline has now accelerated to the extent that there are currently only about seventy families on the whole of West Falkland, plus another twenty on the islands. In addition approximately 2,000 people including support services are temporarily based at the Military Garrison at Mount Pleasant The base has been designed to be very largely self-contained.

The total labour force of the Islands is about 1,300. A number of small businesses provide a range of services, but there is extremely limited manufacturing, fabricating or construction capacity, and the services required to meet the demanding standards of the international oil industry are still relatively undeveloped.

Fishing now dominates the economy. The sale of fishing licences generated some L26.8 million in 1991-92, representing some 64% of all government revenue and an even greater proportion once transfers were eliminated. At the height of the season from March to June, between 5,000 to 7,000 fishermen on some 120 vessels were working in Falkland waters. Yet with the shore based economy remain tenuous. Most of the fishing vessels are in foreign ownership and have foreign crews. Many of these vessels are virtually self sufficient for supplies and gain what requirements they have from the reefer vessels calling to export the fish or from visits to South American mainland ports. The Falklands provide agency services, freshwater, some fresh produce, emergency medical services and some engineering and servicing facilities. Fisheries protection vessels, harbour control and aerial surveillance are all based in Port Stanley.

Whilst the Falkland Islands economy has been transformed by fishing, it has also become very heavily dependent on it. The decline of farming has meant that fishing licences are the only serious alternative external source of government revenue to that derived from the invested surpluses of earlier years. But this investment income is still in itself quite insufficient to sustain the Island's economy in the event of any steep decline in fishing revenues for whatever reasons. Not only have fishing revenues been necessary to prop up the farming industry during the depression experienced during recent low wool prices, but virtually all the services which underpin the community - education, health, transport and communications - are effectively financed wholly, or in part, from fishing.

As fishing revenues are notoriously unstable - dependent as they are on unpredictable biological and geophysical changes, competitive pressures from other fishing grounds and variations in consumer demand - a diversification of the economic base has been for some time a priority of government policy. The exploitation of likely oil resources offers by far and away the most attractive potential.