Offshore oil in Sri Lanka likely by 2009

The potential for hydrocarbon accumulation in the Mannar Basin could have Sri Lanka producing its own oil and gas by 2009, a senior official said this week. Neil De Silva, Director General of the Petroleum Resource Development Secretariat, said there is a 70% chance that hydrocarbons will be found in the Mannar Basin. Moreover, India has found sizeable sediments on their side of the Basin.

"We are quite encouraged by this," he said speaking at a discussion organized by the Ceylon Chamber of Commerce (CCC) on government plans to offer exploration licences in Sri Lanka’s northwest coast to the oil and gas industry. CCC Chairman, Mahen Dayananda said that successive governments have made attempts to develop the oil and gas industry in the country but to no avail. He said however there was never any doubt of the country's potential.

The confirmation of the potential of oil and gas in Sri Lanka is good for the country in terms of its economy. This subject is completely new for the country but Dayananda said there is a lot of potential for business in venturing into this area. The 2-D seismic surveys of the Mannar Basin, which shows the presence of sediments’ rocks in which oil and gas is found, was conducted by Norwegian company, TGS NOPEC, to which the Sri Lankan government recently paid US$10 million after the company claimed a 'breach of contract.' Despite the highly controversial settlement, the seismic data which is currently stored in Australia can be sold by the government to any interested party for US$1 million.

So far, two exploration blocks have been allocated to India and China. However the final decision on which blocks to be given to the two countries has not been made by the government yet. According to the seismic data, which De Silva said he has personally viewed and studied, there is 5 km of sediments where typically, only 3 km of sediments shows great potential for the presence of oil and gas. TGS NOPEC and De Silva are the only parties who have studied and interpreted the data so far, analysts said.

De Silva outlined a work plan which includes finalizing the exploration blocks to be given to India and China in the licensing round. Out of the eight remaining blocks, the government is planning on calling for tenders on three of those. The blocks have been selected and waiting for final approval. A call for tenders on the remaining three blocks will mostly likely occur in the next few years.

He also said that a Model Petroleum Resource Agreement and computer model must be prepared since negotiations are to begin soon. "This is a very important document that will outline the operational work companies will do." There are several other agreements that will also comprise this agreement which will specify conditions on the use of Sri Lankan labour and Sri Lankan businesses. They must also market the exploration blocks 'to attract companies' and prepare the essential regulations to address environmental concerns and dangers to the eco-system.

The bid package for the tender process should be completed and ready by July 2007. De Silva also said that 3-D seismic surveys, which would cost approximately US$17 million per block is too much of an expensive endeavour for the country to undertake. "Let the bidders do the 3-D seismic surveys due to the costly nature. Sri Lanka is a poor country," he said.

In this respect, the United States Trade and Development Agency (USTDA) has given a grant of US$500,000 to formulate these necessary regulations because any country or company coming to Sri Lanka would like to see 'transparent and practical policies which will give them confidence.' De Silva said that the environmental damage was primarily due to spills from supertankers. Worldwide offshore oil and gas exploration and production contributed only 2% of the oil pollution in the oceans. "The Sri Lankan government should give high priority to a strict and comprehensive regime for health and safety."

A timeline of 4 – 5 years was outlined by De Silva. According to him, it will take until 2008 to acquire the exploration licenses, up to 2009 to explore petroleum and the complete appraisal and development of oil and gas production is expected to be complete by 2012. Oil exploration is 'high risk but is high reward game.'

"The oil industry takes root in two phases," De Silva said. The first is the exploration phase which could be long-term or short-term but is relatively stable and the second is the development and production phase. During the exploration phase, government policies and programmes have to be developed. "We have to get it right and we all have to help in getting it right."

Sri Lanka can benefit from the experience of other regions that have had significant petroleum and offshore oil and gas exploration and production. The prudent thing to do would be to develop the industry by taking into consideration the characteristics of business community and the country at large. What is successful for one nation does not automatically guarantee success for another. De Silva said that Norway was an example of a slower rate of development of the industry through an interventionist approach but could afford it. In contrast, Britain allowed market forces to shape the oil industry. So should Sri Lanka's approach be interventionist or market driven? "It should be whatever makes sense for the country," said De Silva but added that initially an interventionist approach might be the way to go.

Local employment, an increase in government revenue and business and opportunities are some of the potential benefits from oil exploration but as with any venture, problems like the destruction of the local culture and habitat also pose challenges. According to De Silva, social problems which arise can be mitigated through sound planning. "The authorities in Sri Lanka need to give attention and dedicate the necessary resources now." He also said that oil is a difficult business for local firms to break into and timing is of the essence. "Business leaders should take an active rather than passive approach to policy planning. It is important to be knowledgeable on the industry."