"It is up to the Cabinet now. They should soon make an announcement awarding exploration rights to the successful bidder," said Dr Neil De Silva, Director General, Petroleum Resources Development Secretariat (PRDS).
Altogether, six bids were received for three exploration blocks carved out in the Mannar basin. The bids were made by three oil companies.
The first block (SL2007 -01-001) received bids from Cairn India Limited, Niko Resources (Cyprus) Limited and ONGC (Videsh) Limited. The second block (SL2007-01-002) received bids from Cairn India Limited and Niko Resources (Cyprus) Limited and the third block (SL2007-01-003) received one bid from Niko Resources (Cyprus) Limited.
The Cabinet of Ministers decided to evaluate only the first block for petroleum exploration on the grounds that no sufficient bids have been received for the other two blocks.
"Once the award is given for exploration, it would mark the beginning of oil exploration in Sri Lanka after a lapse of some 25 years," he said.
Dr De Silva said that oil exploration in Sri Lanka began about 40 years ago with acquisition of the first offshore seismic reflection survey by Compaigne General de Geophysicque (CGG) performed on behalf of the Ceylon Petroleum Corporation in 1967.
Between 1967 and 1983 close to 18000 km of 2D seismic data were acquired and seven wells drilled. Although hydrocarbon shows were encountered in one of the wells in Pesalai no commercial hydrocarbon accumulations were discovered.
The Mannar basin is under-explored, De Silva said, with only one exploratory well situated on the north-eastern shallow present-day continental shelf of Sri Lanka.
"No deep-water drilling has occurred to date. Two speculative seismic data acquisition programmes were conducted in the Mannar Basin in 2001 and 2005 and subsequent studies performed on the data acquired indicate areas of significant petroleum potential with large scale structural and stratigraphic traps present in the basin," Dr De Silva said adding that that the chances of finding oil, as earlier reported, had been calculated at 60 percent.
Speaking to the Island Financial Review Dr De Silva said that the bidders had to bid for a minimum exploration work programme, the amounts offered as signature bonus, production bonus, the percentage share of profit petroleum based on a investment multiple and the extent of participation of the National Oil Company.
Simply put a signature bonus is a payment the oil exploration company is expected to pay the government once the award to explore for oil is given, a one-off payment along with a production bonus.
The investment multiple is widely used in the oil extraction industry and is calculated by dividing Pre Tax Revenue with the investment.
According to Dr De Silva the share of profit, smaller at the initial stages, should increase significantly as time progresses.
"A life time of an oil field is about 20 years. Towards the latter stages Sri Lanka could end up with a major share of the profit," he said.
Once oil is found and commercial extraction commences, the oil company is allowed up to 70 percent of the revenue to cover its investment. The government expects a 10 percent royalty, the profit share based on the investment multiple, taxes (currently at 15 percent) and the revenue of the participating National Oil Company.
The Exploration licence is valid for eight years and divided into three stages of three, two, and three years.
To progress from one stage to another the oil exploration company would have to complete whatever it laid down in the work programme, for which the government would charge a 25 percent guarantee.
The second and third stages should result in at least one well in each stage while 30 percent of the territory must be relinquished back to the state after eight years.
"This will also ensure that the oil exploration company will then concentrate on areas they think are more likely to have oil," Dr De Silva pointed out.
An extension is possible after the fourth stage if a potential discovery is made. The entire territory is to be handed over to the government, except the areas where oil is discovered.
"Everything had been thought of. We studied contracts between other governments and oil exploration companies and have selected the best profit sharing concept."
"If oil is discovered, the agreement between the oil exploration and government would be to address the country’s oil needs before exporting is even considered," Dr De Silva said.
Prior to investing in any area, Dr De Silva explained that oil companies would evaluate the political risk, marketing risk and geological risk.
"Political risk is the potential for major policy changes, such as nationalisation while marketing risks involve factors such as production profiles and marketability of the produced petroleum."
"Assuming these risks are negated, the risk of finding oil in the Mannar Basin boils down only to the geological risk that can be estimated at 60 percent," he said.
Another factor that would have been considered by the bidding parties is that the Mannar Basin has had no oil discoveries to date and Sri Lanka has to compete with countries that have already discovered oil such as India, Bangladesh, Africa and the Middle East.
