Falklands Votes With $167 Billion in Oil Revenue at Stake

Falkland Islands
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As the inhabitants of the Falklands Islands prepare to vote in a referendum on their sovereignty on Sunday, Argentina has already declared the vote illegal and vowed to disrupt the nascent oil industry in the region that it sees as a theft of its natural resources.

The majority of the eligible voters among the 2,800 inhabitants of the Falkland Islands - or Las Malvinas as Argentina calls them – are expected to choose to remain an overseas British territory when they vote on March 10 and 11.

Though Argentina has already said that it will ignore the outcome, the vote is expected to ramp up the already heated war of words between the U.K. and Argentina, whose relationship has deteriorated since the discovery of oil reserves in the region.

(Read More: Another Falklands Conflict? Argentina's Rhetoric Heats Up)

There are an estimated 60 billion barrels of oil around the Falklands basin worth $167 billion dollars in royalties and taxes for the Falklands' government which will receive 26 percent of the profits from companies drilling for oil and nine percent royalties on every barrel sold, according to U.K.-based Edison Investment Research.

Oil Companies Undeterred

Indeed, after finding oil in 2010, the oil company Rockhopper Exploration, teamed with Premier Oil in a 600 million pound ($900 million) deal to drill the Sea Lion oilfield in the Falklands north basin, estimated to hold around 300 million barrels of oil worth more than $30 billion.

The company declined to comment on the potential impact of the vote but Ian McLelland, director and sector head oil & gas at Edison Investment Research, told CNBC that Argentina's rhetoric had not seemed to put off the five oil companies now actively exploring or drilling in the Falklands.

"The arrival of [other oil companies] Noble Energy and EDF-backed Edison International (no relation to Edison Investment Research) as drilling partners to Falklands Oil and Gas could be viewed as indicators of falling political risk, rather than the contrary," McLelland added.

By proxy, the British government stands to benefit from the oil royalties as the local government has said it will start to pay for its own defence once it receives its oil revenue windfall. There are 1,500 British soldiers garrisoned on the Islands, paid for by Britain.

Argentina, whose tax revenues in 2012 were $125 billion, has dismissed the referendum as a "public relation's exercise," yet one Latin American analyst told CNBC that the rights to the Islands' natural wealth is a driving force in Argentina's fight for sovereignty over the Islands.

Oil the Real Issue?

"Oil has a part to play [in the dispute]," Jimena Blanco, senior Latin America analyst at Maplecroft, told CNBC. "The poet Jorge Luis Borges said the 1982 Falklands conflict was about two bald men [the U.K. and Argentina] fighting over a comb. Now, the conflict is about two not-so-bald men fighting over oil and fishing [rights]," Blanco said.

Argentina invaded the Falkland Islands in 1982, starting a two-month conflict with the British military in which over 900 people died. Though Argentine forces surrendered and ended the conflict, the country has never relinquished its territorial claims over the islands and their natural resources.

Blanco said that Argentina did not have the political appetite or military might to enter into an armed conflict with the U.K. again, though its increasing dependence on foreign oil imports has made the natural wealth found in the Falklands more of a moot point for the South American economy.

(Read More: Oil Industry Mulls Next Steps for Venezuela)

"Argentina has not enforced this yet but it says that it will sanction any company supplying services to – or any company involved in –oil exploration in the Falklands. For example, they could sanction Barclays in Argentina as it funds companies involved in oil exploration in the Falklands," Blanco said.

"Already, any ship flying the Falkland Islands emblem cannot dock in Argentine ports and now Argentina's regional partners in South America are doing this, making it harder for oil companies - or any ship with supplies for them - harder to operate. Argentina is leading a regional initiative and now all South American countries recognize Argentine sovereignty over the islands," she said.

A spokesperson from Britain's foreign ministry told CNBC on Thursday that the U.K. government backed oil exploration around the Falklands and dismissed Argentina's claims to the resources.

"Despite Argentine threats and disinformation, Falkland Islands hydrocarbons exploration is a legitimate business which the U.K. Government fully supports. Argentina's claims about taking legal action are empty rhetoric. Argentine domestic law does not apply to the Falkland Islands," the spokesperson said.

"We unequivocally support the right of the Falkland Islanders to develop their natural resources for their own economic benefit."