Premier Oil PLC (London: PMO) has agreed to a $1 billion deal to take a stake in oil drilling in the UK-controlled Falkland Islands, but its greatest obstacle could be Argentina's government.

Although Falkland islanders have British citizenship, Argentina, itself a former satellite of Spain, has laid claim to the Falklands since the 1820s. Tensions boiled over in 1982, when Argentina invaded the British-controlled islands, but the British fought them off, resulting in the death of around 1,000 soldiers between the two countries.

Fishing rights have been a point of contention, with the British giving Argentina an annual concession, and the discovery of petroleum has renewed disputes. In February 2010, Argentina said that ships traveling to the island would require a permit to sail through Argentine waters.

Premier has partnered with Rockhopper Exploration (London: RKH), which discovered oil in the Falkland Islands in 2010. Premier will give Rockhopper $231 million in cash and another $770 million for infrastructure payments for a 60 percent stake in the most promising commercial development, known as the Sea Lion. Shares of Premier rose 4.73 pounds to 363.53 pounds at Thursday's market close. Shares of Rockhopper fell 7.75 pounds to 266.25 pounds.

Despite the political risks, Premier is pushing ahead.

I don't want to sound flippant, but the oil industry deals with this type of political risk, of border disputes, of disputed territories all around the world, frankly, Tony Durrant, finance director of Premier, told Reuters.

He added that the difficulty of raising debt helped push the company to make the deal, adding, The Argentinean situation doesn't help but it's much more the state of the capital markets at the moment.

The company has the blessing of the British government. We have been unequivocal in our support for the people of the Falkland Islands as they seek to expand their economy, a spokesman for the British Foreign Office told The Guardian, describing the drilling as a core principle of self-determination, and one which we are determined to uphold.

The ultimate fate of oil drilling in the Falklands may be decided by the island itself. The local government is planning to hold a referendum on sovereignty in the first half of 2013, with many citizens indicating that they want to remain British.