Cairn India Limited who won the bid to explore for oil in the Mannar Basin will sign the Petroleum Resource Agreement on 7 July at Temple Trees, the official residence of President Mahinda Rajapakse. "They were expected to sign the agreement today (30 June) but they will be here on 07 July instead and the signing ceremony will be held at Temple Trees," Minister of Petroleum and Petroleum Development Resources A. H. M. Fouzi told the Island Financial Review. He said that details will be made public soon after the signing takes place. Cairn India is expected to incorporate a company in Sri Lanka in order to commence operations in Sri Lanka. According to analysts Malaysia’s success had been attributed to the country’s policies of making sure that although foreign entities developed their oil reserves that adequate technical and knowledge transfers took place so that the country could fully own its petroleum resources, refineries and operational facilities. Today, Petronas, wholly owned by the Malaysian government, is a leading fully integrated oil and gas company listed in the Global 500’s largest corporations in the world with a presence in over 30 countries. Oil producing Latin American countries such as Mexico and Venezuela could not reap the desired benefits because oil exploration and extraction was in private hands. It was only recently that Venezuelans took control of their oil fields and progress is slow in terms of distribution of benefits to its people. Nigeria extracts oil but because of political instability, corruption, bad management and the ever present threat from armed guerrillas, the country has no capacity in place to refine its own oil as the foreign companies controlling the operations there naturally thought against investing. The country’s crude oil is exported, refined and imported back, so when oil prices surged riots broke out in the country as many people could not afford the fuel hike. Cairn India won the bid to explore for oil in Block SL2007-01-001 where water depths range from 15 to 1,500 metres on the 3,400 sq km block for which two other companies submitted their bids. "Everything had been thought of. We studied contracts between other governments and oil exploration companies and have selected the best profit sharing concept," Dr Neil De Silva, Director General, Petroleum Resources Development Secretariat (PRDS) told the Island Financial Review last month. He 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 based on an investment multiple and the extent of participation of the National Oil Company. 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. 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. Cairn India Ltd is expected to invest over US $ 10 million on off shore exploration for gas and oil deposits in the Basin where water depths range from 15 to 1,500 metres on the 3,400 sq km block for which it bid. According to available estimates, however, a single exploration well in shallow waters will cost about US$ 10 million and US$ 30 million in deep waters, therefore Cairn India’s investment is more likely to exceed US$ 10 million several times over. |
