TED Case Studies

Falkland Islands Oil Dispute

CASE NUMBER: 346

CASE MNEMONIC: FALKOIL

CASE NAME: Falkland/Malvinas Island Oil Dispute

I. Identification

1. The Issue

The Falkland/Malvinas Island War of 1982 seemed to be a war over islands with an economy based on a couple of thousand sheepfarmers. Since Britain has re-established itself as the controlling power of the Falkland Islands, discoveries of large oil reserves and tremendous fish stocks in the surrounding waters of the islands have made them a valuable commodity. Argentinean claims of sovereignty over the islands continues unabated, although recent dialogue over the future of the potential oil fields in the Southern Atlantic have begun. Not only will the economic impact be immense on the inhabitants of the small islands, but also on the delicate ecological system in place on the still somewhat pristine environment.

2. Description

Since the 1982 war over the disputed Falkland/Malvinas Islands (heretofore referred to as the Falkland Islands), the United Kingdom and Argentina have once again established diplomatic ties. This accomplishment has proved to be a catalyst for negotiations on the future of the islands. The disputed islands consist of 2,317 (July 1995 est.) islanders of British descent on a land mass of 12,170 sq. km. Currently, the Falkland Islands are a dependent territory of the United Kingdom, in opposition to the Argentinean claims of ownership.

The Falkland Islands would seem to be irrelevant in the scope of such large, economically powerful countries. The islands have no arable land and no permanent crops. The terrain and climate are extremely treacherous. The terrain is rocky, mountainous and does not allow much shelter from the harsh weather conditions. The climate is considered cold marine, with some form of precipitation usually falling half of the year. Snow has been know to fall year round. High winds, lack of vegetation, and weather allow for little indigenous life or anything else, to flourish (1).

These seemingly insignificant islands in actuality are quite a prize. The fishing and oil industries of the islands have enabled the islands to become self sustaining (with the exception of military assistance from the United Kingdom). The traditional economy of the islands has been wool with all economic activity either directly or indirectly related to the sheep industry. In 1987, that began to change. The government began selling fishing licenses to foreign trawlers operating within the Falklands exclusive fishing zone (200 nautical miles surrounding the islands). These license fees total more than $40 million per year and support the island's health, education, and welfare system (2). Although the fishing industry is now the principle source of revenue in the Falkland islands, this may eventually change in favor of oil. ( see SQUID case)

In the waters of the Southern Atlantic/Antarctic region where the Falkland Islands are located, large fishing stocks and oil reserves have lured many industrialized countries to their potential profits. In a study conducted by tow private companies, Geco Prakla of Norway and Spectrum of Britain, it is estimated that the potential oil reserves may exceed by more than 50% the reserves of the UK sector of the North Sea. The British Geological Survey announced a 200-mile oil exploration zone around the islands in 1993. Early seismic surveys suggest substantial reserves capable of producing 500,000 barrels per day. These potential oil reserves in the areas around the Falkland Islands would make the South Atlantic Archipelago one of the largest oil producing areas within the next decade (3).

The fragile environment consists of various forms of marine life. The United States and others have begun negotiating the future of Antarctica and the waters off her coast. In 1991 a protocol to protect the Antarctic environment was signed by 31 nations. This plan would ban mining and oil exploration for 50 years. The United States is at the forefront of the fight to lift the ban on mining after the 50 year period is over, and inserting a clause allowing any nation to pull out. (4). 14 of the nations have ratified the protocol as of July, 1995. Other environmental agreements in place concerning Antarctica include the Agreed Measures for the Conservation of Antarctic Fauna and Flora (1964); Convention for the Conservation of Antarctic Seals (1972); Convention on the Conservation of Antarctic Marine Living Resources (1980). ( see ANTARCT case)

In 1994 at a meeting between the Argentine and British Foreign Ministry's Working Group on Falkland Island oil exploration, a report was submitted on the environmental impact of oil exploration on the South Atlantic archipelago. Environmental Recourses Management (ERM) a UK based group, was contracted by the Falkland Islands Governing Council to study the effect of development, particularly oil on the island and its community. The report calls for the use of refineries based on the South American mainland, although no country is specifically named. The report stressed the fundamental change on the way of like that oil will have on the island communities. The ecology of the islands would be altered dramatically, although the impact could be somewhat alleviated by gradual changes. The development of an almost non-existent highway system and expansion of airport facilities are improvements required in the short run.

The Falkland Islanders are concerned about the impact of oil exploration on their unique environment. Although they profess a hatred of the Argentines since the April 1982 invasion, the Falklanders said their overriding concern is to maintain the special ecological habitat of the South Atlantic archipelago (5). There are no longer any land mammals indigenous to the Falkland Islands. The indigenous wild fox became extinct about 100 years ago. There are some 65 different species of birds that occupy the islands at various times throughout the year. These include the black-browed albatross, Falkland pipit, peregrine falcon, and striated caracara breed. The islands are also breeding grounds for several million penguins. These include the Rockhopper, Magellanic, Gentoo, King and Macaroni penguins (6).

In October of 1986, the U.K. declared a 200 nautical mile continental shelf leaving it to the authorities of the Falkland Islands to take legislative measures for its implementation. After the re-establishment of diplomatic ties between the U.K. and Argentina and in Feb. 1990, the Governor of the Islands issued a proclamation establishing a 400,000 sq. km. continental shelf in Nov. 1991, vesting in the Crown its natural resources. Argentina reiterated its claim to these same waters through new maritime legislation (7).

In December 1991, a U.K.--Argentine high level contact group on hydrocarbon matters was established to exchange information and views on events in the South Atlantic as they unfolded. It was based upon the 1989 Madrid Declaration which paved the way for the restoration of diplomatic ties. The principle factor in U.K.--Argentine relations is that no act or activity carried out by either government may constitute a basis for affirming, supporting or denying their respective positions with regard to sovereignty of the Falkland Islands. Officially the high level contact group met four times, with much additional liaison taking place before the signing of the Joint Declaration of Cooperation over Offshore Activities in the South West Atlantic on September 27, 1995 in New York. The Joint Declaration creates a Commission charged with submitting to both governments recommendations on the maritime environment, hydrocarbon developments and marine collaboration. The Commission is designated to meet at least twice per year, and recommendations shall be reached by mutual agreement (8).

The Joint Declaration also creates a new geographical Special Area of cooperation covering some 20,000 square kilometers of straddling waters controlled by both governments. It has been divided into six tranches, and a sub-committee, subordinate to the Commission, will oversee development of the Special Areas. Terms synonymous with sovereignty have been avoided. The Special Area mechanism therefore offers a testing ground for collaboration in the now least-disputed part of the overall disputed area. It is envisaged that companies will operate on a joint venture basis with 50 percent licensed by the Falkland Islands Government (FIG) and 50 percent by Argentina. There is at present no timetable set for seeking nominations for hydrocarbon exploration in the Special Area (9).

Subsequently, several statements were issued (Joint, U.K., Argentinean, and FIG). The question remains as to whether the oil companies will view the Joint Declaration as substantially reducing the political/legal uncertainty which has in the past kept them out of the disputed territory. Paragraph 6 of the Joint Declaration, requires both parties to abstain from taking action to frustrate hydrocarbon development (10).

The Offshore Minerals Ordinance became law in December 1994 and the Offshore Petroleum (Licensing) Regulations in September 1995. Significantly, one week after the signing of the Joint Declaration, FIG launched its unilateral licensing round in London and about 60 companies expressed interest. Some 19 tranches, each comprising a number of blocks, have been made available to the north and south of the Islands. A comprehensive system of national legislation for licensing, taxation, and environmental protection has been established. The unilateral licensing round closes July 1, 1996 when the success of these measures will be seen. Relations between the U.K. and Argentina continue to improve, and in November two former state energy companies, British Gas and YPF (Yacimientos Petroliferos Fiscales), publicly announced their intention to jointly study the hydrocarbon potential of the first licensing round. In January of this year a double taxation agreement was also signed (11).

The issue of sovereignty over the Falkland Islands became an issue in 1964 when it was debated by the UN Committee on Decolonization. Although nothing has really been accomplished to date, the Falklanders and the U.K. still entertain the thought of the Falklands becoming a sovereign state. On May 21, Argentina warned Britain not to pursue a UN resolution recognizing the right of Falkland islanders to self- determination, saying 'any change of status (of the British colony) would lead to the freezing of fishing and oil talks' with London. The U.K. responded by claiming that Argentina should not be surprised by their action. Mr. Di Tella, Argentina's foreign minister, was reacting to suggestions that the UN Committee on Decolonization might consider including a self-determination clause in a Falklands resolution when it meets in New York this July. The committee has previously rejected pressure from the UK and the Falklands to include a clause on the islanders' right to self-determination, instead passing a resolution that merely encouraged dialogue between London and Buenos Aires (12).

Discussing the Malvinas Falkland Islands, President Carlos Menem underlined that "our negotiations with the United Kingdom were positive. We resumed diplomatic relations and we are signing very significant and interesting agreements." He explained that "the contracts to prospect for and exploit oil in the South Atlantic are meaningful steps towards the recovery of Argentine sovereignty over the Malvinas Islands because problems crop up and get resolved." The chief executive indicated that the fishing agreement between Argentina and the United Kingdom "may be signed before the end of the year, or at the beginning of next year."(13)

3. Related Cases

Shetland Case
Azeri Case
Exxon Case
Colomoil Case
Venez Case
Ecuador Case
Antarct Case
Komi Case

Keywords

(1): Trade Product = OIL

(2): Bio-geography = MARItime

(3): Environmental Problem = OIL Spills and Contamination

4. Draft Author:

David J. Ross (June, 1996)

II. Legal Clusters

5. Discourse and Status:

DISagreement and INPROgress

In March 1996 an agreement was signed by both Argentina and the United Kingdom. The Joint Declaration on Cooperation Over Offshore Activities in the South West Atlantic does not address the problem of the Falkland Islands sovereignty, although the parties are currently negotiating. The Falkland sovereignty issue should become more clear in July when the U.N. Committee on Decolonization meets. Previous treaties and agreements have been signed in the past between the two parties in regards to exploiting the southwest Atlantic, with most falling through.

6. Forum and Scope:

FALKland Islands and UNILATeral

7. Decision Breadth:

3 (Falkland Islands, United Kingdom and Argentina)

8. Legal Standing:

Treaty

The Joint Declaration of Cooperation Over Offshore Activities in the South West Atlantic was signed on Sept. 27, 1995.

III. Geographic Clusters

9. Geographic Locations

a. Geographic Domain: South America

b. Geographic Site: Southern South America

c. Geographic Impact: Argentina, Falkland Islands

10. Sub-National Factors:

Yes

The Falkland Islands are a colony of the United Kingdom. The Falklanders do not consider the islands to be a part of Argentina (which claims them) and are of British decent.

11. Type of Habitat:

Ocean

The conditions on the islands are extremely harsh. Some form of precipitation falls more than half of the year, and has been known to snow year round. High speed westerly winds are almost constant.

IV. Trade Clusters

12. Type of Measure:

Licensing [LICEN]

In December 1995 the Falkland Islands began a unilateral licensing round in London and about 60 countries expressed interest. 19 tranches, each comprising a number of blocks, have been made available to the north and south of the Islands. A comprehensive system of national legislation for licensing, taxation, and environmental protection has been established. The current round ends on July, 1 1996.

13. Direct v. Indirect Impacts:

DIRect

14. Relation of Trade Measure to Environmental Impact

a. Directly Related to Product: YES, Oil

b. Indirectly Related to Product: YES, Marine Life

c. Not Related to Product: NO

d. Related to Process: Oil Contamination

Infrastructure improvements and industrial development are necessary for the collection and refinement of oil products. The still pristine Falkland Islands and marine areas surrounding them will undergo a substantial transformation at the onset of the petro industry development. The potential effects of oil on marine environments are extensive and well documented.

15. Trade Product Identification:

Oil

16. Economic Data

The Economic impact is yet to be determined. The potential extraction rate of oil has been predicted at 500 000 barrels per day. The potential economic impact of such a large amount of oil is extensive (particularly on a country of 2,317 people). The fishing industry generates license fees that total more than $40 million per year and support the island's health, education, and welfare system.

17. Impact of Trade Restriction:

N/A

18. Industry Sector:

Oil and Gas [OILGAS]

19. Exporters and Importers:

Falkland Islands and Global

The Falkland Islands have yet to export a single barrel of oil. It is assumed that Falkland oil will enter the global market place and distributed globally.

V. Environment Clusters

20. Environmental Problem Type:

Pollution Sea [POLS]

21. Name, Type, and Diversity of Species

Name: Many

Type: Many

Diversity: Many

22. Resource Impact and Effect:

HIGH and PRODUCT

23. Urgency of Problem:

N/A

24. Substitutes:

Conservation [CONSV]

VI. Other Factors

25. Culture:

YES

Culture is going to play a large role in the unfolding events in Falkland Island oil exploration and development. The Falklanders are extremely environmentally sound and recognize their unique habitat for various animals. The strict environmental standards that they are placing on the oil companies is related to their culture and sense of awareness in the larger environment. Should the islands come under the control of the Argentinean Government, the strict environmental standards would probably be somewhat relaxed.

26. Trans-Boundary Issues:

YES

There is potential for the trans-border problems. Should an oil spill or large pipeline leak, countries such as Argentina, Uruguay, Brazil and Antarctica could all be affected. Uruguay, Argentina and Brazil are all potential sites for the oil refinement process.

27. Rights:

NO

28. Relevant Literature

(1) CIA

(2) Ibid

(3) George, Dev. "International Report"

(4) "Protocol to Protect Antarctica Signed by 31 Nations at Meeting." International Environment Reporter Current Report.

(5) "Environmental Impact of Oil Exploration on Falkland Islands Topic for U.K., Argentina." International Environment Reporter Current Report 10 August 1994.

(6) "Falkland Islands." Encyclopedia Britannica.

(7) "Argentina-United Kingdom: Joint Declaration on Cooperation Over Offshore Activities in the South West Atlantic." American Society of International Law.

(8) Ibid

(9) Ibid

(10) Ibid

(11) Ibid

(12) "Argentina warns UK over Falklands." Financial Times

(13) "President Says Policy Toward Falklands Residents 'not bad.'" BBC Summary of World Broadcasts

References

"Argentina warns UK over Falklands." Financial Times 22 May 1996. Pg. 8.

"Argentina-United Kingdom: Joint Declaration on Cooperation Over Offshore Activities in the South West Atlantic." American Society of International Law. March 1996. Vol. 35, No. 2; Npg.

World Fact Book. "Falkland Islands" Central Intelligence Agency. U.S. G.P.O. 1995.

"Environmental Impact of Oil Exploration on Falkland Islands Topic for U.K., Argentina." International Environment Reporter Current Report 10 August 1994. Vol. 17, No. 16; Pg. 682.

"Falkland Islands." Encyclopedia Britannica. Online ed. 1996.

George, Dev. "An Incentive to Decolonization." Offshore August 1995. Pg. 10.

George, Dev. "Deciphering the Falkland Deal." Offshore November 1995. Pg. 8.

George, Dev. "International Report." Offshore May 1996. Pg. 32.

Nightingale, Paul C. and Gregory A. Bibler. "Environmental Law in Latin America." International Environment Reporter Current Report 11 October 1989. Vol. 12, No. 10; Pg. 507.

"President Says Policy Toward Falklands Residents 'not bad.'" BBC Summary of World Broadcasts 26 May 1996.

"Protocol to Protect Antarctica Signed by 31 Nations at Meeting." International Environment Reporter Current Report 9 October 1991. Vol. 14, No.20; Pg.540


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