Fourteen years after the first well was sunk off the Falkland Islands, a tax dispute threatens investment in a nascent oil industry that may yield more than $10 billion in royalties for the British territory’s 2,563 residents.
The government sent a bill for capital-gains tax to Rockhopper Exploration PLC that’s more than the archipelago’s gross domestic product. The English company, which discovered oil at the Sea Lion field, has yet to pump its first barrel of crude at the site about 300 miles off Argentina and about 700 miles from the tip of Antarctica.
The unexpected level of capital-gains tax demanded — four times what Rockhopper estimated — risks scaring funds away from further prospects in the Falklands, which has struggled for investment.
“You don’t want to be overly aggressive toward your first project before it’s even been given an investment decision,” said Ivor Pether, a fund manager who helps oversee about $15 billion at Royal London Asset Management, which has added to its Rockhopper holdings this year.
At stake is the future of a new industry for the island chain, defended by Margaret Thatcher in the 1982 war with Argentina, which still largely depends on fishing and tourism for its $160 million economy. The problem over how tough a deal to strike is similar to that faced by nations with major resource discoveries such as Uganda and Mozambique. It also casts a spotlight on how tax authorities treat farm-outs, when the oil discoverer sells a stake in a find to raise funds.
