LONDON BRIEFING:While several energy firms have drawn a blank in explorations of the South Atlantic, much optimism remains

DREAMS OF an oil bonanza off the coast of the Falklands Islands have taken another knock with news yesterday that Desire Petroleum has plugged and abandoned its latest well in the inhospitable waters of the South Atlantic.

Desire, named after HMS Desire – the English naval ship that claimed to have discovered the islands in 1592 – is one of a number of energy exploration companies convinced there are vast reserves of oil and gas just waiting to be tapped off the Falklands. According to some estimates, as much as 60 billion barrels of oil and oil equivalent could lie beneath the ocean there, reserves which would put the area on a par with the North Sea.

But first they must be found.

And, so far, despite the high hopes of the exploration firms, this is proving tricky. Shares in Desire plummeted again yesterday on the latest disappointing news. Its shares have fluctuated wildly since exploration in the area resumed almost a year ago, as the market reacts, or, more accurately, overreacts, to each geological update.

No geological expertise was required, however, to interpret the update on Desires “Dawn” prospect in the North Falkland Basin. The company told shareholders it had found no significant hydrocarbons in the Dawn prospect and the well will be plugged and abandoned.

Cue another collapse in the shares of the Aim-listed company, this time from 47.75p to 35.25p, a fall of more than 25 per cent.

At one stage last year, the price hit a high of 168.5p and there was even talk of a takeover bid at £2 a share. While it would be unfair to hold the company wholly responsible for the yo-yo performance of its shares, it has not helped matters with some recent statements, which have clearly been over-optimistic.

For example, in late November, Desire proudly proclaimed it had, indeed, discovered oil at its Rachel North well in the Falklands. Less than a week later, it was forced to admit the black gold was, in fact, water and the well was plugged and abandoned.

Exploration doesn’t come cheap and Desire apparently has enough funds for one last well in the northern part of the basin.

Its been a similar roller-coaster ride for fellow explorer Rockhopper, named after the species of penguin found in the Falklands, although the company has an advantage over its rivals in that it has successfully flowed oil to the surface from one of its test wells, Sea Lion. The company believes the find will be commercially viable although it is still too soon to be certain.

Rockhopper will start to test more of its prospects in the weeks ahead as it takes over the rig it shares with Desire. There is a fear that both Desire and Rockhopper have already tested their most promising prospects and hopes of a Falklands oil bonanza have dimmed.

Major exploration companies such as Shell have already scoured the area but withdrew more than a decade ago after failing to find commercially viable prospects. There’s a chance that, this time round, the search could be successful, as extraction techniques have become more advanced. The rising price of oil has also lowered the bar on the commercial viability of extracting the oil.

Many of the 2,900-strong population of the islands have invested in the companies exploring off their coast and, along with other shareholders, they can expect another wild ride in the year ahead as we come closer to knowing what really lies beneath the ocean there.

But even if the dream of the Falklands as a new oil frontier should prove to be true, and the oil does start to flow, there will still be significant challenges ahead.

The resumption of drilling in the area, almost 30 years after the Falklands war, has revived political tensions between Britain and Argentina. While there is not thought to be any real danger of military action, Argentina is unlikely simply to stand by as such huge wealth is extracted from waters lying just 480km (300 miles) from its coast and over which it still claims sovereignty.

Of equal concern are the environmental risks of drilling off the Falklands, home to vast colonies of seabirds. These include penguins and petrels, many of which are unique to the islands. The Falklands is also home to two-thirds of the world’s black-browed albatrosses.

In the wake of BPs Deepwater Horizon disaster in the Gulf of Mexico, the Falklands exploration companies will undoubtedly have to comply with tough safety regulations on the extraction and transportation of the oil.

Fiona Walsh writes for the Guardian newspaper in London