Sri Lanka issued it first ever oil exploration licence yesterday when Cairn India signed the Petroleum Resources Agreement (PRA) with the government at Temple Trees,.
According to this agreement if commercially viable deposits of hydro carbons are found, based on the investment multiple the shares in profits will begin from 12.5 percent to Sri Lanka and increase to 60 percent within five years of commencement of oil extraction.
According to Dr. Neil De Silva, Director General of the Petroleum Resources Development Secretariat, Sri Lanka’s share could reach significant proportions towards later stages of the lifetime of an oil rig.
The government expects a 10 percent royalty, apart from the profit share based on the investment multiple, taxes (currently at 15 percent) and the revenue of the participating National Oil Company which will be incorporated if and when commercial oil extraction commences.
The government yesterday received a cheque for US$ 1 million as a signature bonus—a thank you for awarding Cairn India the license.
Cairn India would invest US$ 100 million to explore the Mannar Basin for commercial hydro carbon deposits in a 3,000 square kilometre block in depths ranging from 200 to 1,800 metres.
According to the PRA Cairn India will explore for oil and gas deposits with the licence that is valid for eight years, broken up into three stages.
According to the programme for the first phase, the Cairn would conduct its own seismic survey of 5,000 km in 2D and 1,000 km in 3D and drill three exploratory wells in the first three years.
Petroleum and Petroleum Resources Development Minister A. H. M. Fowzie said that Cairn would commence operations within the next six months and wanted the nation to pray that oil would be discovered soon as Sri Lanka’s requirement of crude oil was 80,000 barrels a day.
While the Petroleum Resources Development Secretariat estimates a 60 percent chance of finding oil or gas deposits, Cairn India has not estimated its chances.
"The exploration of oil is a risky business with no guarantees of success. There are no short cuts. Exploration must be carried out first and therefore we do not have probability ratios," Indrajit Banerjee, Executive Director and CFO, Cairn India said.
He said that the Mannar Basin had not been explored before and was a frontier petroleum province.
"The company has been in the region for more than a decade and we have a good understanding of its geography," he said.
Cairn Lanka (Pvt) Ltd was incorporated yesterday as fully owned subsidy of Cairn India and will hold a 100 percent participating interest in the block.
Securing technological and knowledge transfers will be key if Sri Lanka is to achieve sustainable gains in the long run.
"According to the agreement Cairn India will undertake to engage local staff and will provide the necessary training," Fowzie said adding that Cairn India was bound by the agreement to employ resources and facilities available in Sri Lanka and could utilise resources and facilities from outside if they were unavailable in Sri Lanka.
Much depends on making a viable discovery and until then both Cairn and the government will adopt a wait and see attitude with regard to future plans.
An official of Cairn India told The Island Financial Review that seismic data available in London on the Mannar Basin would be purchased by the company although they planned to carry out their own surveys.
"We would naturally want to depend on our own data," he said.
Cairn will also place orders for oil rigs as it would take 12 to 24 months to be delivered and as such these orders will be made simultaneous with the seismic survey.
The Sri Lankan side of the Mannar Basin is about 30,000 sq km and was divided into eight blocks. Two blocks were allocated to India and China on nomination but according to Fowzie no clear response has been given by either country.
India had earlier made a request for the block that was awarded to Cairn but the government had refused," Fowzie told The Island Financial Review last month.
He said in the same interview that bids for the remaining blocks would be called for soon. However he told journalists yesterday that the government was adopting a wait-and-see attitude on how best to proceed.
The process which culminated in Cairn India receiving the first oil exploration licence began when 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 had been received for the other two blocks.
Dr. De Silva told The Island Financial Review that oil exploration in Sri Lanka had begun 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 shores were encountered in one of the wells in Pesalai no commercial hydrocarbon accumulations were discovered.
The Mannar basin was 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, had been calculated at 60 percent.
Fowzie said that Cauvery basin off Jaffna was another potential hotspot for oil and gas and the government was working out a plan for it too.
The agreement was signed despite opposition from the JVP as we reported yesterday.
