The hunt is on for oil in the South Atlantic

Twelve oil groups, including Shell, Lasmo and a company set up by the former Governor of the Falkland Islands, Sir Rex Hunt, were yesterday awarded licences to explore for oil in the South Atlantic.

But British Gas, which teamed up with the Argentine gas group YPF, has seen its bid for an exploration licence rejected by the Falkland Islands government.

Lasmo has won licences for two of the seven tranches awarded yesterday in partnership with Clyde Expro and Desire Petroleum, of which Sir Rex is deputy chairman and Dr Colin Phipps, who formerly headed up Clyde Petroleum, is chairman.

Desire, which has also won licences for a further two tranches in its own right, has been financed by a debenture shares issue to local Falkland Islanders which means that if it strikes oil it could create a handful of instant millionaires in the South Atlantic.

The waters around the Falklands constitute the last great frontier territory for the world's oil industry and could either contain hydrocarbon riches beyond anyone's wildest dreams or nothing at all.

The seven tranches so far let cover an area of 12,800 square kilometres north of the Falklands and have been divided up between five consortiums. They are expected to invest at least $200m over the next five years on seismic surveys and test drilling. The first wells could be sunk as early as spring 1998.

The tranches let yesterday represent only a tiny chunk of the entire designated exploration zone in the South Atlantic which covers 400,000 square kilometres - an area about half as big again as the North Sea and the same size as Texas.

Depending on how initial development goes a second licensing round will probably be launched in the next two to three years, inviting companies to bid for blocks to the south-west of the Falklands which are jointly controlled by the Falkland Islands government and Argentina.

Initially, the Falklands government will earn only acreage rentals from the exploration companies totalling about $1.8m over the first five years.

But if oil is found in large quantities and full-scale production proceeds, it will be entitled to claim 41 per cent of the revenues in royalties and corporation tax.

The Falklanders have promised to use any money to pay for the upkeep of the British military garrison on the islands - currently estimated at pounds 60m a year. Ultimately, the Falklands government has said it would repay Britain for some of the costs of the Falklands War if its income from oil permits.

A total of 14 companies from 10 countries comprising six rival consortiums submitted bids. Of these only two - Lasmo and Clyde Expro - are wholly British. Two are American, one is Italian, one is Japanese and one is registered in Dubai.

Dr Nigel Fannin of the British Geological Survey, which has acted as technical adviser to the Falklands government, rejected suggestions that British Gas had been disadvantaged by pairing up with an Argentine company. "They were bidding for blocks for which there was strong competition and they were outbid - it is as simple as that," he said.

Dr Fannin said seismic surveys had proven that the correct geographical structures existed in the South Atlantic to create and then trap oil. "Whether it is there in sufficient quantities we will not know until the first wells are drilled," he said. "We are where the North Sea was 30 years ago."

The exploration licences will last for 35 years. The companies awarded them have submitted work programmes covering phases one and two which will last for a total of 12 years. At the end of the first five-year period, up to 50 per cent of the acreage must be relinquished, depending on how many exploration wells have been drilled.

Andrew Gurr, chief executive of the Falklands government, said the exploration programme would be closely monitored to ensure that the Falklands' natural environment was respected.

Wendy Teggart, a Falklandscouncillor, said: "We want to encourage development of the oil industry but in a way which strikes a balance with existing industries such as sheep farming and fishing."