Fury as Desire's 'oil' find in Falklands turns up water

Shareholders in Desire Petroleum were enraged today as hopes of a major discovery in the Falklands fizzled out.

Investors had piled into the explorer pushing the shares up 30% on Thursday after it said "these results indicate that [the Rachel North well in the North Falklands Basin] is an oil discovery". But their dreams this morning were dashed after the company admitted the well only contained water.

The prospect of UK firms finding oil in the Falklands has led to fears that rioting in Argentina would be rekindled.

The stock collapsed today, tumbling 46%, or 60p, to 71.5p, as Desire said the sample on which it based initial hopes was "markedly different" to the main reservoir in the Rachel North well, which will now be plugged and abandoned. A deeper target is thought to be oil bearing but of poor quality. One private client stockbroker said: "A lot of investors are fuming about this - there are a lot of burnt fingers out there."

The latest blow comes as US diplomatic cables obtained by Wikileaks claimed drilling in the Falklands is not commercial. Analysts believe the region could contain up to two billion barrels, but ExxonMobil chairman Brad Corson told US officials he did not believe it was profitable. Desire denied accusations it had jumped the gun with its Thursday announcement and said it had made its initial assessment in line with standard industry practice.

But chairman Stephen Phipps said it was "extremely disappointing" that the follow-up investigations had "dashed all the promise of this being Desire's first oil discovery in the North Falkland Basin". The latest news also delivers a £41 million financial blow to Phipps and his sister, company secretary Anna Neve, who between them own 19.6% of the company, in the space of three days. On Friday their combined stake was valued at £89.3 million but that tumbled to £47.9 million today as shareholders bailed out.

Desire was pinning hopes on Rachel North being the second discovery in the region this year behind explorer Rockhopper's Sea Lion discovery, which holds an estimated 242 million barrels in recoverable reserves.

Rockhopper, which has a 7.5% stake in Rachel North, saw its shares fall 10% to 309.75p.

Desire's two unsuccessful wells in the region have cost it around £20 million each so far but it has £75 million for two more drilling efforts. It plans to move on to the Dawn/Jacinta prospect on the southern edge of the basin.

Evolution Securities analyst David Farrell cut his rating to reduce, saying: "This is a major blow to Desire and the prospectivity of the North Falkland Basin. Desire is drilling the Dawn/Jacinta well next but this is extremely high risk."