Business Times

Continuing saga of oil exploration in the Mannar basin

Serious issues over Cairn India
By Dulip Jayawardena

I have been closely following the quest for offshore oil in the Mannar basin for the past four years and wrote numerous articles pointing out the various issues involved with challenges and comments leveled at the Ministry of Petroleum Resources and its statutory agency the Petroleum Resources Development Secretariat (PRDS).

It is disheartening to note that none of my articles has had any impact on the present arrangements for offshore oil exploration. To this end I would like to refer to my article in the Financial Times (presently Business Times) of September 20, 2009 which summarized offshore exploration activity since 1970s and the accelerated programme since 2005 where much hopes have been placed in striking commercially exploitable oil and gas resources in the Mannar basin.

Some issues raised were related to the maritime boundary with India, the award of an exploration block to Cairn India in 2008 as well as the commitments on exploration expenditure under Phase 1, totaling to $112 million.

I would also like to refer to my article in the BT on Sunday of June 20, 2010 where I pointed out to the PRDS and the government that the likely money spent up to the commencement of exploratory drilling should have been $42 million.

From the various statements made by the PRDS it is revealed that drilling of three exploratory wells will commence by the middle of 2011 after the interpretation of 1750 Km3 of 3D seismic data. However the third quarter performance of Cairn India has highlighted a total exploration expenditure of only $10 million which also included a 3D seismic survey in an offshore block in the Palar basin on the east coast of India. As indicated in my earlier report of Cairn India’s activity, both the Mannar block and the block in the Palar area are being explored jointly with shared expenditures. It is also revealed that three exploratory drill holes are to be drilled in each of these blocks.

The BT on September 5, 2010 in a report titled “Drilling in Sri Lanka amidst imminent sale of Cairn India” reported that the UK based Cairn Energy Plc will sell its majority share of Cairn India to Vedanta Resources another UK based mining company which is for the first time diversifying its activities to oil exploration and production. Cairn Sri Lanka (Pvt) Ltd (CLPL) is a wholly owned subsidiary of Cairn India (Pvt) Ltd (CIPL).

It was also reported that Neil De Silva of the PRDS had stated that the deal has to be “endorsed” by the Government of India and the Sri Lankan oil exploration activities will not be affected. The deal involves the sale of 50-60 % of Cairn Energy shares in CIPL to Vedanta for $9.6 billion at Indian Rs (IR) 405 per share. There is also an open offer of a 20 % stake to minority shareholders at IR 355 per share and this offer opens on 11 October 010. Further under the terms of the deal Cairn Energy will be paid an extra IR 50 a share for not competing with Vedanta in India, Bhutan, Pakistan and Sri Lanka. Financial analysts believe that the deal is good for Cairn Energy shareholders. The share price Vedanta has offered i.e. IR 405 per share is a 32 % premium to CIPL’s closing price over 90 days.

Vedanta will buy 40 -51 % of CIPL from Cairn Energy and the final number of shares sold will depend on the results of the open offer which would take Vedanta’s stake to 60 %. Vedanta will directly acquire 31 to 40 % interest in CIPL while the remaining 20 % is by the Vedanta Group firm Sesa Goa presently engaged in copper refining.

The Oil Ministry of India has written to Cain Energy requesting them to make formal applications for approval to transfer the ownership in each of the 10 properties where CIPL holds an interest through a complex maze of 32 subsidiaries incorporated worldwide namely seven in Australia, two in Mauritius, one each in Jersey, British Virgin Islands, Singapore, Sri Lanka and nine each in United kingdom and the Netherlands.

None of the subsidiaries is incorporated in India. In this regard CLPL which holds the Mannar block will be left out as India has no jurisdiction over the property. The Oil Ministry has written to the Securities and Exchange Board of India (SEBI) for advice on this deal but stopped short of stating that it was contingent upon government approval. The Ministry further asserts that the deal will have to comply with regulations under Production Sharing Contracts (PSCs) for the 10 properties which make government or partner of state owned ONGC approval required for any stake sale. The government has also indicated to SEBI its right to vet a change of ownership of a company operating fields like the giant Mangala oil field in Rajastan which is at the centre of Cairn Energy’s deal with Vedanta.

In the light of the above developments I would like to query where CLPL lies and whether the PRDS has briefed the Sri Lankan Government on the legality of the Petroleum Resources Agreement (PRA) signed on 7 July 2008. Vedanta on 16 August 2010 made a presentation on a controlling stake in CIPL. Vedanta is primarily a metal mining and refining company and own operating facilities for copper zinc and aluminum.

A recent decision was taken by the Indian Government to reject a plan to mine bauxite (aluminum ore) in Orissa over environmental concerns. This decision comes after four years of a global campaign against Vedanta’s plan to mine in the State that the government states could affect large swathes of forested hills considered sacred by indigenous tribes. If Vedanta is successful in taking a controlling interest in CIPL the authorities in Sri Lanka should examine the company’s environmental record as CLPL is wholly owned by CIPL. In this regard it is pertinent to mention about the earlier Phosphate project in Sri Lanka which was subject to severe criticism due to environmental and human rights issues.
Some lawmakers of the present administration were vociferous in their request to cancel the project in late 1980s.

In the above presentation Vedanta reported that 1750 kms of 3 D seismic surveys were completed in the Mannar Block and three leads were confirmed, and drilling will start in the 2nd. Quarter 2011.
On October 8, 2010 Cairn Energy shareholders approved the Vedanta deal. It is also reported that ONGC, Gas India Ltd. (GAIL) will not make any counter offers. The Government of India is expected to approve the Vedanta Cairn energy deal in a few weeks and issue the necessary approvals by early 2011.
In conclusion I would like to bring to the attention of the Government of Sri Lanka that on May 23, 2010 CLPL and CIPL announced farming in opportunities in Sri Lanka and India.

(The author is a retired Economic Affairs Officer United Nations ESCAP and can be contacted )

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