The opening salvo in the coming diplomatic battle for the potential oil resources of the Falkland Islands was yesterday fired by the Secretary of State for Defence, Michael Portillo.

Visiting the Falklands, Mr Portillo said Britain would be demanding a larger share of the islands' potential oil wealth than has so far been hinted at by the Falklands' semi-autonomous government. Britain spends pounds 67m a year on the islands' defence.

Around 12 of the world's oil companies are carrying out geological tests. If positive, they would transform the Falklands into one of the world's elite oil-rich communities. Estimates have already pointed to an annual oil revenue of pounds 1.1bn for 20 years.

Although the islanders have said they want to pay the defence bill themselves, Mr Portillo hinted yesterday that the Treasury is looking for a new revenue formula from them.

Speaking in the capital, Port Stanley, Mr Portillo said the defence cash would not be enough. "This may seem paradoxical but we think it would be much easier to make an agreement before we know whether there is oil or not." He suggested a formula unrelated to defence. "It should bear some relation to what size the oil reserves turn out to be and how much revenue that generates."

The Falklands have also offered to pay some of the pounds 3.6bn which Mr Portillo said Britain had spent boosting the islands' defence since the war with Argentina in 1982.