The Government of Sri Lanka signed a Petroleum Resources Agreement (PRA) with Cairn Sri Lanka (Pvt) Ltd (CLPL), a wholly owned subsidiary of Cairn India (Pvt) Ltd (CIPL) on July 7, 2008 to carry out oil exploration and production in Block SL 2007-01-01. The exploration period will be eight contract years under three phases and shall run concurrently. The total likely money spent (LMS) is $147.2 million with the first phase having a total commitment of $112.1 million including 3 exploratory drill holes. It has been reported that the 3D seismic and other surveys have been completed but the expenditure as given in the agreement namely $45 million has been grossly under spent.
The Petroleum Resources Development Secretariat (PRDS) has announced that exploratory drilling will commence by mid 2011.
However it was reported in the Journal Oil Voice on 23 May 2010 that CLPL called for farm-in opportunities and is offering to farm out 50 % of its equity to another partner. Since there were other bidders for this block it is unethical for CLPL to farm out 50 % equity without even carrying out exploratory drilling. Moreover the arrangement for this farm out has to be scrutinized by the Sri Lankan Government but it is not a requirement in terms of the signed PRA.
Such farm–in opportunities are possible in the PRA which is a copy of the Indian Production Sharing Contract (PSC) that was presented to the PRDS by Fugro Data Solutions Ltd (FDSL) as a part of a contract it signed with the Ministry of Petroleum Resources Development (MPRD) on 15 May 2007 valued at 500,000 Pounds Sterling. I had highlighted this matter in the Financial Times (BT) of 2 March and 4 May 2008.
The recent developments as indicated in my article in the BT on 17 October 2010 regarding the sale of over 60 % of controlling interest in CIPL by Cairn Energy Ltd to Vedanta is possible due to a loophole in the Indian PSC that FDSL blindly copied and presented to MPRD as a Model PRA.
The Indian government has now realized this drawback and has amended the PSC for the New Exploration Licensing Policy (NELP 9). The revised Section 28.2 dealing with share sale-triggered management change as well as the licensee’s change in relationship with its parent (example CIPL) who is supposed to have given bank, financial and performance guarantees, states that prior written consent of the government is essential for these changes. The existing PSC and the copied PRA speaks about ‘government consent’ but not ‘prior written consent’.
Accordingly is suggested that the model PRA should be amended when calling for international bids for the remaining blocks in the Mannar basin as well as the Cauvery basin. The Ministry of Petroleum in India offered 34 exploration blocks on 15 October 2010 for international bidding under NELP 9. These include 8 deep water , 7 shallow water and 19 on land blocks.
The PSC for NELP 9 will require that the bond that bidders have to furnish for each block will be forfeited if the PSC is not signed within 90 days of the award of the block. Further operators who do not drill wells down to their target depths would have to pay damages for the entire well .The bidders offering to undertake 3D seismic surveys over the entire block will be exempted from carrying out 2D seismic surveys. The initial exploration period for deep water blocks similar to those in the Mannar basin has been increased from 4 to 5 years. This may allow the operators to bid for blocks that they relinquished at any point before completing the minimum work programme.
The Indian government has decided to abolish the NELP and introduce the Open Acreage Licensing Policy (OALP) from 2012. Under the OALP companies can suggest any block for offer at any time without waiting for the announcement of the bids as was the case of NELP. The companies will be able to access the initial exploratory data from a National Data Repository that will be established by the Ministry of Petroleum in India.I have highlighted the above issues so that the Sri Lankan Government can fine-tune the model PRA and maybe attract more international exploration and production companies when bids are called for the remaining blocks in the offshore areas. Further the Government should call for details from CLPL about its farm-in opportunities where 50 % of its equity is to be or has been farmed out to another company and te terms and conditions of such transfer of equity.
(The author is a retired Economic Affairs Officer
United Nations ESCAP and can be reached on firstname.lastname@example.org. He has written extensively and has expert knowledge on
Sri Lanka’s efforts to strike oil offer off the coastline).