The prospect of extracting oil in seas off the Falklands Islands moved a step closer on Tuesday when BHP Billiton, the mining giant, agreed to buy a stake in licences owned by a small exploration company.

Falkland Oil and Gas, with a market capitalisation of £159m, has yet to do any drilling in the south and east Falkland basin. But it said the agreement to sell 40 per cent of its stake in its licences would see BHP drill at least two exploration wells in the next three years.

The minnow’s shares moved up 5 per cent, or 8.5p, to 173p on the news.

Falkland Oil and Gas estimates that the basin might contain as much recoverable reserves as the North Sea and that its top 10 licences could contain as much as 10 billion barrels of oil.

Industry analysts say these estimates are optimistic. Recoverable oil is often much less than the overall reserves in exploration projects.

Tim Bushell, chief executive of Falkland, said the introduction of an important partner such as BHP had been a big strategic objective. “The key thing about this deal was that we had to attract a company with deep pockets. Small companies like us don’t have the capacity to bring in a rig,” he said.

BHP said it would pay Falkland $10m in historical costs, and would retain the right to increase its interest in the licences to 65 per cent. The mining company said it would pay 53.3 per cent of the costs of the forward work programme under the 40 per cent share, and 86.5 per cent of costs if the agreement reached 65 per cent.

Other companies with exposure to the Falklands, such as Desire Petroleum and Global Petroleum also saw their share prices rise sharply. Desire rose almost 10 per cent and Global, which has a stake in Falkland Oil, gained 13 per cent.

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