02/23/2012 11:22 am ET Updated Apr 24, 2012

Falklands Flare Up -- Could a New Oil Find Re-Ignite an Old Conflict?

The Falkland Islands, a British windswept archipelago in the southern Atlantic off the coast of Argentina, last had its moment in the media spotlight three decades ago, when the two nations fought a brief but vicious conflict after Buenos Aires invaded the islands, providing a PR boost to Argentina's ruling junta.

But, Argentina lost, and the 11-week conflict claimed more than 900 lives, leaving Britain in control of the islands.

UK analytical firm Edison Investment Research is now reporting that the Falklands' oil industry could potentially be worth $180 billion in royalties and taxes, news that has reignited the smoldering diplomatic dispute between London and Buenos Aires.

On December 13th British-based oil and gas exploration company Rockhopper Exploration Plc announced that a new well proved its Sea Lion field 80 miles off the Falklands coast is bigger than expected, and is now projecting that it could recover as much as 430 million barrels of crude from its Sea Lion concession, 80 miles off the Falklands coast. The announcement encouraged other firms prospecting in the Falklands' offshore waters, most notably Borders and Southern Plc and Falkland Oil and Gas Ltd.

Since Rockhopper Exploration Plc's announcement, Britain has moved a number of naval units into the Falklands' waters, prompting on February 16th Argentina's Foreign Ministry to issue a communique commenting on the alleged "militarization of the South Atlantic" after the United Kingdom "sent a destroyer, a nuclear submarine and a prince" to the Falklands, demanding that London "report on the presence of a nuclear submarine in an area that is free of nuclear weapons" before concluding that their presence would constitute a violation of international treaties.

Argentinean policy over the disputed island chain has both a domestic and diplomatic context. On February 16th Argentinean Foreign Minister Hector Timerman officially accepted the UN General Assembly's offer to mediate between Argentina and Britain on the Falklands, stating that, "Argentina accepts the UN Secretary General Ban Ki-moon's offer to provide his good offices and if Britain accepts them too then we are on the right path; the path to a diplomatic solution, which is what Argentina wants."

But, being a democracy, not all Argentineans support their government's current policy on the "Malvinas," as the Falklands are known in Argentina. On 16 February La Nacion, a conservative newspaper frequently critical of governmental policy and Argentina's second highest-circulation daily published a crucial commentary by Vicente Palermo on the "political maze" of the Falklands where he noted first that the chances of a change in stance on the part of the United Kingdom are very low and that successive Argentinean governments have done very little to win the islanders over, preferring to resort to "a policy of harassment and isolation," which in the end will merely serve to empower the Falklanders' lobby in Britain.

Even worse, earlier this month Catholic Bishop Jose Maria Arancedo called for the Argentinean claim to the Falkland Islands not to be used as a political issue.

Further losing the PR campaign at home, the previous day Buenos Aires' Clarin newspaper reported on the police repression of a protest by former Falklands War conscripts in the capital, which the General Workers Union leader Hugo Moyano said marked a new trend in government policy.

The fact that Argentinean military conscripts lost their battle two decades ago against British military forces has made them in the eyes of many Argentineans unworthy of consideration. Commenting on the fact, another Clarin editorial by Eduardo van der Kooy noted the "government's ability to create its own problems, even where they do not exist," citing the Falkland Islands as an example, since President Cristina Fernandez de Kirchner's recent actions on the matter had made veterans of the war feel used and betrayed after they were not invited to the Presidential residence Casa Rosada for her speech on the Malvinas and remained dissatisfied by subsequent pronouncements on the subject.

On the plus side for Argentina, it has received backing from fellow Latin American countries, which have announced that they will not allow ships flying the Falklands flag to dock in their ports.

And if push comes to shove and military operations occur again, Venezuela's President Hugo Chavez, speaking last week at a meeting of the Bolivarian Alliance for the Peoples of Our America (ALBA) told journalists, "If it should occur to the British Empire to attack Argentina militarily, Argentina won't be alone this time. Venezuela is no power, but we've got some weapons, and the will to face any imperialist aggression."

More ominously for Britain and the United States, on February 10th, except for Washington, the 34-nation Organization of American States (OAS), the entire hemispheric community minus Cuba, backed Argentina's claim to the Falklands.

Buenos Aires is watching. On February 17th the Argentinean newspaper Ambito Financiero, citing confidential sources, reported that the Bahamian-flagged oil exploration rig The Leiv Eiriksson platform, contracted by Borders and Southern Plc and Falkland Oil and Gas Ltd and prospecting Falklands waters alongside Rockhopper Exploration Plc's Ocean Guardian oil rig, "was found, on 16 February, to be exploring in Argentine waters," according to "irrefutable" satellite images.

In such a context, will Britain and the U.S. be willing to alienate the entire Western Hemisphere south of the Rio Grande on behalf of roughly 3,000 sheep herders?

Given the potential for conflict and Argentina's determination not to let the issue slide, one can only hope that Rockhopper Exploration Plc's along with Borders and Southern Plc and Falkland Oil and Gas Ltd offshore explorations come up dry and, if not, wonder how far Britain is willing to go to retain its control.

Cross posted with

John C.K Daly is the chief analyst at the energy news site Dr. Daly received his Ph.D. in 1986 from the School of Slavonic and East European Studies, University of London.

Follow on Twitter @OilandEnergy and join us on Facebook.

To stay on top of important articles and research with our free private members service, sign up to the Intelligence Report here.