Oil drilling starts in disputed Falklands
* Well spudded despite protests
* Explorers' shares rise
* Spat will complicate exploitation of reserves
By Tom Bergin
LONDON, Feb 22 (Reuters) - Drilling on the first oil well in the Falkland Islands in over a decade started on Monday, despite protests from Argentina, which claims the British territory.
Explorer Desire Petroleum DES.L said it spudded - or broke ground - at a well on its offshore "Liz" prospect at 1415 GMT.
Liz could contain reserves of up to 400 million barrels, analysts said, although the risk of hitting nothing was also seen as high.
The run-up to drilling in the Falklands led to rising tensions between Britain and Argentina, which went to war over them in 1982.
Argentina said earlier this month the exploration was illegal, and blocked the loading of pipes on to a ship which it said had operated in the Falklands, known as Las Malvinas in Argentina.
The British government has protested to Argentina over a law passed in December that includes the disputed islands within the Argentine province of Tierra del Fuego.
The sea around the Falklands could contain up to 17 billion barrels of oil and 51 trillion cubic feet, or 9 billion barrels of oil equivalent, of gas, according to a report in 2000 by the U.S. Geological Survey.
However, the last flurry of excitement about an oil rush on the islands was killed by disappointing drilling results in 1998. Oil prices of $10/barrel at the time also contributed to the view the islands did not have commercially viable reserves.
Higher oil prices and advances in drilling technology have spurred optimism in recent years.
Nonetheless, after their failure in 1998, the big oil companies, such as Royal Dutch Shell (RDSa.L), have not returned.
The companies currently involved are all small explorers, either privately owned or listed on London's junior AIM market.
Only one major international company, Anglo-Australian miner and oil producer BHP Billiton (BHP.AX), is active in the area.
The dispute with Buenos Aires over sovereignty is expected to make exploitation of any oil found more expensive than otherwise since supplies and equipment cannot be imported from Argentina, which has its own oil and gas industry.
The spat also means any gas discoveries will need to be very large to be commercially viable as the island's population of around 2,500 is a limited market and the gas cannot be piped to the mainland.
Only if a gas discovery was very large would it justify the construction of a liquefied natural gas (LNG) terminal from which the gas could be exported in pressurised ships.
LNG facilities cost billions of dollars to build.
Shares in Desire jumped almost 10 percent in early trade, on expectation of the announcement, before easing back to trade up 3.6 percent at 1556 GMT.
Shares in its partner in the blocks, Rockhopper Exploration (RKH.L), traded up 7 percent, while Falklands Oil and Gas (FOGL.L) and Borders & Southern (BSTH.L), which are also exploring in the area, rose 5 percent and 3 percent respectively.
Seven wells in the seas around the islands are planned for this year.
Analysts said poor results would likely kill interest in exploration in the area for many years, not least because most of the companies involved only have enough cash to pay for the current drilling programmes. (Editing by David Cowell)