ICE Case Studies

CASE NUMBER: 16

CASE MNEMONIC: FALK

CASE NAME: The Falkland Oil Conflict

Case Author: Sebastian Pawlowski, May, 1997



CASE BACKGROUND
ENVIRONMENT ASPECT
CONFLICT ASPECT
ENVIRONMENT OVERLAP CONFLICT ASPECT
RELATED INFORMATION

I. CASE BACKGROUND

1. Abstract

The 1982 war over the Falkland/Malvinas Islands between Argentina and Britain was more than just a sovereignty dispute. In fact, Britain has had a long history of intervening in Latin America. Today, as political instability continues to plague the Middle East, Britain has begun to turn to Latin America to meet its oil needs. The Falkland/Malvinas Islands, with an abundant supply of oil within its territorial waters, now means money to Britain. However, what will oil exploration in the waters of these islands mean to the environment?

2. Description

There is more to the Falklands/Malvinas War of 1982 than meets the eye. It is abundantly clear that Argentina occupied the Islands, a British colony, to refocus attention from economical and social problems at the time. In short, it was a political maneuver by the Argentine government to escape its own state of social chaos.

This case will examine the history, motives, and consequences of oil exploration in this area from both the Argentine and British perspectives. By consequences I simply mean the environmental damages that oil exploration can have on any region.

Argentina, Oil, and Minerals: The Need to Recover Economically

The Argentine Government, under Raul Alfonsin, had begun to change the country's economic structure in the mid-1980s. By the end of 1986, for example, the austrial was slowly devaluated so as to realign Argentine currency with international markets. Also, in July 1986, President Sarney of Brazil and President Alfonsin signed a twelve-point protocol agreement, calling for a complete elimination of all barriers to bilateral trade in capital goods, mutual financial support between both countries's central banks, as far as adjustments to trade imbalances, and the expansion of a joint investment fund to expand productivity, increase food trade, and cooperate more in energy related issues.1

In May 1985, however, the most impressive initiative occurred. In anticipation of the Baker initiative by about five months, during a visit to Houston Alfonsin lobbied American oil executives to play a more aggressive role in exploring his countries's oil reserves, promising a seemingly untapped region of the world. Alfonsin's attempts to persuade these business people was founded in the assumption that without foreign investment in energy, Argentina's economy would forever lose its regional role as an economic leader in not only the Southern Cone, but in all of Latin America.2

During this time, Argentina was more energy self-sufficient than the 1960s, when approximately 60 percent of domestically consumed oil was provided by imports. However, the major problem within the Argentine oil industry was hidden within the state-owned oil company, Yacimientos Petroliferos Fiscales. To begin, this company held the monopoly in this area. Second, it had no coherent energy policy. In short, the main problems were buried well below the surface, with years of corruption and neglect, provided mainly by the nationalistic military regimes of the past.3

The Houston plan would double gas production for industry, with a 30 percent oil production increase. Three thousand exploratory wells would be drilled, eighteen thousand other wells would be developed, and fifty thousand miles of seismic lines would be measured. The grand total for these efforts would reach twenty five billion dollars between the years 1986-2000.4

Alfonsin believed that his new oil policies and their start-up costs would in the end finance themselves. However, although the State's support in exploring flexible approaches to the economy was assured, a graver problem that could impede the restructuring efforts was the financial record and organizational structure of Yacimientos Petroliferos Fiscales. At this time, the company owed five billion dollars to foreign creditors. Alfonsin, in an unprecedented move, slashed the company's exploration budget. 5

Argentina now seemed to be on an economic course from which it could reap some rewards. Alfonsin, had pushed for serious structural policies for the economy and was met without heavy opposition. This was unlike previous times when any changes of this magnitude were generally fought with strong public discord.

By 1986, different initiatives were sponsored by Alfonsin to save the Argentine economy. However, the many bureaucratic regulations as well as political alliances that have made Argentina renowned and feared as a place for investment. Therefore, on April 1986, he announced a plan to move the capital from Buenos Aires to Viedma, a small Patagonian town. For him, this move would generate a new conscience in Argentina. The Second Republic in the country had been born. Also, more than just a shift of personnel, the move would generate an important psychological impact. By replacing Buenos Aires and moving to a town of about 400,000 people, a sense of growth and expansion would grow. Essentially, it was like opening up the Pampas to a new world.6

To replace the capital, however, money had to be poured into this small town to allow for the transition to occur. The transformation of this small town to the center of Alfonsin's second Republic would have a price tag of over 2 billion dollars. Much of the funds for this grand effort were hoped to be derived from foreign investment and international financial intermediaries like the World Bank.7 However, the transition never took place because of limited public support.

Britain and Latin America: A Long Relationship of Oil Exploration

Britain and Latin America have had a long relationship concerning the demand and supply of oil. Although Latin America cannot compare the Middle East, as far as the quantity of oil which it can supply, it has still played a vital role in sustaining British needs. Philip (1989) wrote:
During the Second World War, Venezuelan oil supplies to Britain were vital. During the First World War Mexican oil, if not perhaps quite so crucial, was still of great importance; Mexican oil also provided the basis of the Cowdray fortune. It is also true that mineral, and above all oil, wealth was the major focus of British foreign-policy interests in some of the South American republics until the outbreak of the Second World War.'8
 
 
During the early part of the twentieth century, bitter rivalry between the U.S. and Britain caused ripples around the world. There were numerous disputes involving the oil interests of these nations up until the 1920s.9 British maneuvering did allow the U.S. into Middle East oil markets. The U.S. was only alleviated by oil discoveries in East Texas during the mid-1920s.10 The U.S., in retaliation, coerced Latin American countries to remain out of the Anglo-Persian Oil Company, backed heavily by British Government funds.

Another tear causing effects upon Anglo-Latin American oil relations involved the fact that most all Latin American oil companies were state owned. With increasing U.S. presence in this area during all of the twentieth century, Britain was soon a small player in the oil market. State-owned companies, such as those in Mexico and Venezuela, were now rich in capital, and closely tied to the U.S. Philip (1989) wrote:

By 1939 Jersey Standard had overtaken Shell as the major investor in Venezuela and all foreign oil companies in Mexico had been expropriated. In the years after the Second World War, moreover, fresh British investment in Latin America (a dollar area) was discouraged and some existing holding liquidated.'11
Other important determinants in shaping British-Latin American oil policies include mixed results in finding more oil (Venezuela, Colombia, Brazil, and Ecuador have traditionally had better records than Argentina), the effects of terrorism on resource companies (Colombia and Peru have had many terrorist situations occur which threaten overall stability and foreign investment), Latin American over-investment in electric power projects, and Latin America's share in world trade (dependency on exporting primary goods had created an imbalance of payments). Burns (1987), writing about the military corrupt government in Argentina and its ties to the state-owned oil company, Yacimientos Petroliferos Fisclaes, notes: "The source of much military corruption under the juntas, it had become the only major oil company in the world to lose more money than it made. By 1986 it had accumulated foreign debt of five billion dollars, one tenth of the national total."12

Why would it be important for Britain to reclaim these Islands? Besides an open door, since Argentina invaded and occupied the Islands first, what other reasons might be of relevance for Britain to become so aggressive over these tiny Islands? The answer is quite simple: it was time for Britain to return to Latin America for oil. In fact, with a debt burden hanging over mostly all Latin American countries, and, with nationalistic military regimes nonexistent, Britain had an opportunity to tangle for some beneficial territory. Philip (1989) wrote: Latin America may become more important to British interests than it has been in the recent past. Before the turn of the century, Britain is once again likely to become a significant importer of oil; with political conditions in the Middle East unlikely to become any easier, there may be value in assuring supplies from one or more of the Latin American exporters. The Falklands, as will be addressed later, is abundant in oil, and the British are selling off licenses for these oil blocks within its new territorial waters to the highest bidder.

Britain, Argentina, and The Little Islands: Money Matters

The discussion can now turn to the control of the British Falkland Islands, what Argentina calls Las Islas Malvinas. The importance of these islands to these two nations derives from the oil within its territorial waters as well as the fishing zones that it now provides to countries like Japan, Poland, and Spain.13

Fishing zones have historically created tensions for these islands. During July, 1994 Britain extended its fishing zones around the islands by 850 miles. At the time Britain claimed that they were protecting the illex squid (see squid case) from being over fished. However, Argentina was outraged by this decision claiming that Britain was simply driven by political motivation; Argentina and Asian fisherman compete for squid in these waters. Moreover, Argentina has accused Britain of merely counterattacking Argentina's 1994 Constitution which extended the country's fishing rights to the Falkland/Malvinas Islands.

The rights to the waters surrounding these islands is also driven by the need to gain more sovereignty in Antarctica(see Antarc case), a region yet untapped for minerals but heavily claimed because of the potential profits involved. Britain has had claims some regions since the early 1800s.

The squid in the waters of the islands provide much income to the residents of this area. In fact, fishing alone accounts for sixty percent of the Falklanders' income. However, there are more parties interested in the available squid than just Argentina, Britain, and the Falklanders, since squid is an essential ingredient in a wide variety of dishes all around the world. In many cases, it is an intrinsic part of cultures. China, Germany, Italy, France, Russia, India, Bangladesh, Ethiopia, Morocco, Norway, and Mexico are countries where squid is a popular dish.

As mentioned, however, the Falkland Islands is believed to have massive amounts of oil and gas reserves within its territorial waters. The United Kingdom now controls these oil areas, since winning the war between itself and Argentina in 1982. According to the British Geological Survey (BGS), approximately half of the 420,000 square kilometer of Falkland Islands waters contain sedimentary basins, holding concentrated areas of Cenozoic and Mesozoic infills.1 "The shallower water Malvinas basin lies to the west of the islands in 200-500 m of water and extends westward into the Argentine area, where there has already been some exploratory success." 14

In 1993, Britain established a 200-mile oil exploration zone around the islands and that oil estimates in this region could produce 500,000 barrels per day. If this occurred, the Falkland/Malvinas Islands would be the largest oil producing region in the world for the next decade. 15

The Big Picture: How the Environment Comes Into Play

The environment is of great concern to the population of the Falkland/Malvinas Islands. Moreover, the surrounding area itself has already been given worldwide environmental protection. Some agreements already in place include Conservation of Antarctic Fauna and Flora (1964); Convention for the Conservation of Antarctica (1972); Convention on the Conservation of Antarctic Marine Living Resources (1980). 16

The area itself includes an abundant array of marine life. Animal life includes the wild fox, 65 different species of birds, and millions of different kinds of penguins, among others. Specifically, some birds at the islands throughout the year include the peregrine falcon, the Falkland pipit, and the carcara breed. Some of the different breeds of penguins include the Gentoo, magellanic, and the King and Macaroni.17

In attempting to preserve the wildlife populations of the islands, the Falkland Government has strategically voiced concern about having any shore-based oil facilities on the islands, so as to reduce the environmental impact of dealing with oil extraction. If, there did seem to be a need to have shore-based facilities they would be located on the South American mainland. Otherwise, the oil would be exported by tankers directly loading the oil offshore.18

Within this structure there are many areas to consider. These include a zoning approach which restricts the areas of development; the human power and financial implications of both preparing and implementing legislation regarding the oil zones; creating a time table for both the development of the zones and implementation of legislation; considering the opportunities for cost recovery; reviewing which environmental standards for oil operation represent the best protection technologies for other regions in the world; considering the progression of oil exploration standards up until the year 2000 (when exploration will likely begin in the Falkland/Malvinas region); considering the needs of the oil industry in regards to the adoption of strict oil exploration standards; considering what kinds of regulations would be required under the oil legislation in the process of being drafted. 19

There are many more environmental policies and plans being considered by the Falkland/Malvinas Government. They involve the immediate designation of sites termed sensitive or valued around the islands with particular wildlife importance; the establishment of buffer zones for key islands and sites; further study to both identify the priorities of the Falkland/Malvinas Islands Conservation and the implementation of baselines that would prepare an inventory of all sites and wildlife resources, setting long term designations for some areas (this is a joint effort with the oil companies currently present).20

The Falkland/Malvinas Islands, the U.K., the oil companies in the region, and the Argentine Government have all joined an effort to prevent environmental catastrophes from occurring. Just recently, Argentina, attempting to better relations with Britain since the 1982 war and gain more sovereignty in the waters within the region has opened up diplomatic channels. It seems as if some progress has been struck. To begin, royalties from any oil and gas discoveries are to be shared. Furthermore, Argentina will have the right to survey the effects of exploration on the environment.21 This could pave the way for future cooperation in this area.

While not advocating the abandonment of oil extraction, one must still consider the realities involved. The annual spillage of oil is estimated at eight million barrels a year. Most recently the world encountered the worst oil spill of all time. In February 1991 Iraqi military forces opened oil pipelines to leak into the Persian Gulf. This action was implemented as part of military tactics during the Gulf War. The damage achieved by this catastrophe was enormous, killing thousands of different kinds of marine species. In March 1989, another oil spill occurred. This time it involved the Exxon Valdez. As it went aground oil was unleashed into the Prince William Sound of Alaska. The oil damaged area covered 4,800 square miles and killed 35,000 sea birds, 10,000 otters, and at the very least nine whales.22

Other oil related environmental catastrophes include:

3. Duration: Complete (1982)

4. Location

Continent: South America

Region: Eastern South America

Country: UK

5. Actors: UK and Argentina

II. Environment Aspects

6. Type of Environmental Problem: Species Loss Sea

7. Type of Habitat: Ocean

8. Act and Harm Sites:

Act Site       Harm Site           Example

Argentina      UK                  Territorial claims

III. Conflict Aspects

9. Type of Conflict: Interstate

10. Level of Conflict: High

11. Fatality Level of Dispute

III. Environment and Conflict Overlap

12. Environment-Conflict Link and Dynamics:

The war was a direct result of an environment-conflict link, especially oil and ocean resources. Internal country dynamics also played a role.
    **********          **********          **********   
    *        *          *        *          *        *
    *DOMESTIC*          *        *          * OIL AND*
    *POLITICS*--------->*CONFLICT*<---------* FISH   *
    *        *          *        *          *        *
    **********          **********          **********   

13. Level of Strategic Interest: Bilateral

14. Outcome of Dispute: Victory

IV. Related Information and Sources

15. Related ICE and TED Cases

TED Cases

Falkoil Case
Shetland Case
Azen Case
Exxon Case
Colomoil Case
Venez Case
Ecuador Case
Antarct Case
Komi Case
Squid Case
ICE Cases

ICE Cases

16. Relevant Websites and Literature

Websites
Falklands-Malvinas Forum
Falklands War
Gemini New Service: Oil deal makes shift from guns to diplomacy"
FK/FA: Falkland Islands
Mercopress New Agency
Falkland Islands or Las Islas Malvinas?
Argentine TOE

Literature Jimmy Burns, The Land That Lost Its Heros: The Falklands, the Post War, and Alfonsin (London: Bloomsbury, 1987).

George, Philip, Britain and Latin America: oil and minerals in Britain and Latin America: a changing relationship, ed. Victor Bulmer-Thomas (Cambridge: Cambridge University Press, 1989).

"Exploration Opportunities Pop Up Around The World," Oil and Gas Journal, 91 (1993).

"Protocol To Protect Antarctica Signed By 31 Nations At Meeting," International Environment Current Report.

"Argentina-United Kingdom: Joint Declaration on Cooperation Over Offshore Activities in the West Atlantic," American Society of International law.

"Argentina Warns UK Over Falklands," Financial Times. 22 May 1996.

"Falkland Islands spells out block offering details," Oil and Gas Journal 9 October 1995.

"Falkland Islands offshore offers high-risk, good potential," Oil and Gas Journal 17 January 1994.

"Squid City," New Republic30 March 1992.

"International: The Richest Islands in the World Maybe,"The Economist 6 November 1993.

South Atlantic: Fortress Falklands Strikes It Rich," Time22 June 1992.

"World: Argentines Reassess Their Role in Decade-Old Falkland Mistake," The Christian Science Monitor 14 April 1992.

"World Falklanders Find Postwar Boom,"The Christian Science Monitor 14 April 1992.

"Get Away From It All to the Falklands,"Times of London 5 July 1985.


NOTES

1. Jimmy Burns, The Land That Lost Its Heros: The Falklands, the Post-War, and Alfonsin (London: Bloomsnbury, 1987), 223.

2. Burns, 223.

 3. Burns, 223.

 4. Burns, 224.

 5. Burns, 224.

 6. Burns, 225.

 7. Burns, 225.

 8. George Philip,Britain and Latin America: oil and minerals in Britain and Latin America: a changing relationship, ed Victor Bulmer-Thomas (Cambridge: Cambridge University Press, 1989), 136.

9. Philip, 136.

 10. Philp, 137.

 11. Philp, 138.

 12. Burns, 224.

 13. "Exploration Opportunities pop Up Around The World,"Oil and Gas Journal,91 (1993),44.

14. "Exploration Opportunities pop Up Around The World,"Oil and Gas Journal,91 (1993),44.

15. Http://gurukul.ucc.american.edu/ted/falkoil.htm

16. Http://gurukul.ucc.american.edu/ted/falkoil.htm

17. Http://oneworld.org/gemini/wk39_gemini_malvinas.html

18. Http://gurukul.ucc.american.edu/ted/falkoil.htm

19. www.falklands-malvinas.com

20. www.falklands-malvinas.com

21. www.falklands-malvinas.com

22. www.falklands-malvinas.com

23. Webster's Encyclopedia(CD-ROM Version) 1994 Helicon Publishing Ltd.

24. Webster's Encyclopedia(CD-ROM Version) 1994 Helicon Publishing Ltd.
 


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November, 1997