AIM-listed Falklands Oil and Gas Ltd (FOGL) said the farm-out agreement covered its entire Falklands exploration acreage and BHP would acquire a 40% interest, effective next January, with an option to increase that to 65%.

BHP will also take over the operatorship of these frontier licences. It plans to drill a minimum of two exploration wells in the next three years.

BHP will pay 53 percent of the cost of the forward work program, and pay FOGL $US10 million to cover some historical costs.

FOGL said the Falkland Islands Government had agreed to extend the term of the first phases of the 2002 and 2004 licences by three years, so they would now expire in December 2010.

As part of this change to the licence terms, a partial relinquishment of the 2004 licences will be made at the end of 2007.

The Government has also extended the second phase of the licences to run for five years from January 2011. Existing work commitments remained unchanged.

“We believe this substantial Falklands acreage will be a good addition to BHP Billiton Petroleum’s global portfolio and we look forward to working with our partner to pursue this underexplored area,” BHP Petroleum exploration president Steve O’Rourke said.

FOGL chief executive Tim Bushell described the BHP farm-in as a landmark deal.

“The introduction of a major company as a farm-in partner has been a key strategic objective over the last 18 months and we are delighted to welcome a partner of BHP Billiton’s calibre and expertise,” he said.

BHP’s entry as operator provided FOGL with its expertise in drilling in deepwater and sensitive environments as well as access to rigs, according to Bushell.

ASX-listed junior oil and gas explorer Global Petroleum owns a 14% shareholding in FOGL.