Financial Times

The saga of oil exploration in the Mannar Basin

By Dulip Jayawardena

Exploration for oil and gas in the Mannar Basin commenced in the early 1970’s with assistance from the former Soviet Union and US exploration companies which culminated in 1984 with the acquisition of 18,000 km of seismic data drilling of seven exploratory and structural wells that were ‘dry’. The Ceylon Petroleum Corporation (CPC) was the repository for the data generated during this period. In 2001 the Asian Development Bank (ADB), at the request of the Government initiated a US$388,000 technical assistance programme that further reviewed exploration prospects for oil and gas, formulate financial and legal regimes for international oil companies and promote inflow of risk capital.

As a part of the ADB initiative, the CPC entered into a non exclusive agreement with Norwegian TGS NOPEC to carry out 1,100 km of 2D seismic survey under Stage 1 and an additional 3,000 km under Stage 11. The cost of Stage 1 was US$1.73 million and was to be incurred by TGS NOPEC upfront. After sale of the data, TGS NOPEC was to recover costs and additional income was to be shared with CPC on an agreed formula.

ADB consultant Dr. Ray Shaw, after reinterpretation of earlier data and the TGS NOPEC data, concluded that the ‘Gulf of Mannar basin represents a new deep water frontier region that has indications of hosting significant hydrocarbon accumulations.’ The results were presented at a conference in Singapore in 2001 which attracted the attention of international exploration and production (E&P) companies.

The Government annulled the agreement in September 2006 after a payment of US$8.5 million to TGS NOPEC and acquired the data by paying over four times the costs. I carried out detailed analyses of the Agreement and concluded that TGS NOPEC was in default. (See Sunday Times FT - 21 January 2007).
The Petroleum Resources Act No.26 of 2003 was certified by Parliament on 9 September 2003 and provides for regulation and recovery of petroleum resources in Sri Lanka. It consists of six parts and includes setting up of the Petroleum Resources Development Committee (PRDC) assisted by Petroleum Resources Development Secretariat (PRDS) headed by a Director General (DG), preparation of Petroleum Resources Agreements (PRA’s), issue of development licenses and fiscal provisions. A major omission was a provision for exploration licenses.

A Ministry of Petroleum and Petroleum Resources Development (MPPRD) was established in 2005 and is responsible for oil and gas exploration and development in Sri Lanka. A detailed study of the above Act and its implications was published. (See Sunday Times FT - March 12, 2006). In pursuance to TGS NOPEC’s seismic survey, eight blocks comprising 33,714 sq km (half the land area of Sri Lanka) were identified. Blocks 1 and 8 were assigned to India and China on a nomination basis. The rest were for international bidding. Further the western margin of these blocks was the Indo-Sri Lanka Maritime boundary. Legal and other implications of such delimitation were highlighted by me (Sunday Times FT - 8 October 2006 and 26 August 2007).

The elimination of the offshore area north of Mannar Island which is more promising due to oil and gas finds on the Indian side baffles everyone who follows E&P activities in the Asian region and one feels that the area recommended was to draw a ‘red herring’. On 15 May 2007, the MPPRD signed a contract with Fugro Data Solutions (FDS) for a total value of Pounds Sterling 500,000. The assignment was to develop a Model Petroleum Resources Agreement (MPRA), marketing bid rounds and assist in evaluation of bids and facilitate negotiations with India and China for the nomination blocks. I carried out a detailed analysis of the above agreement which was published (Sunday Times FT - 4 May 2008) and also proved beyond doubt that the MPRA was copied from the Indian Production Sharing Contract PSC (Sunday Times FT - 2 March 2008). I had also elaborated on PSC’s in the newspaper of 2 September 2007. It was also reported that a Norwegian company was selling the seismic data for which the Government paid US$8.5 million for exclusive rights to the global industry
(Sunday Times FT - 12 August 2007).

The Government decided to call for international bids for blocks 2, 3 and 4 after Road Shows in London, Houston, and Kuala Lumpur during August to September 2007. It will be interesting to find out how much money was spent on these Road Shows, the identity of officials who attended from Sri Lanka and also whether the local agent for the consultant and a prospective bidder accompanied the official team.
After the conclusion of the Road Shows, the Minister of MPPRD stated that the reserves of oil in the blocks 2, 3 and 4 are over 1 billion barrels. This figure was challenged but there was no response (Sunday Times FT - 16 September 2007). Further the editorial of the Sunday Times FT on 9 March 2008 exposed the bungling of the government on oil exploration from the TGS NOPEC deal and the scrambling of the Central Bank (CB) and MPPRD to take control of oil exploration. It has now been revealed that both the PRDS under the MPPRD and the Central Bank (CB) has one ‘expert’ each for this subject although grandiose plans were under way to recruit specialized staff.

Further it is also learnt that the CB has an academic with no practical experience in oil exploration and the two geophysicists assigned to PRDS from GSMB stayed for only a month and could not work with the Director General. There is a cadre of 24 technical officers and only the DG is there after over 5 years of the PRDS and it is still a one man’s show! However the DG did not lose time to recruit a Legal Officer with no knowledge of petroleum law and Director Finance with no exposure to the upstream oil industry.
The bids for the 3 exploration blocks closed in January 2008 although there was a request from law makers to extend the date. However the DG/PRDS was keen to close bids before India closed their offers for over 55 blocks by April 2008 and later it was learnt that India extended the date to August 2008.

Official Government news portals in October 2007 reported ‘200 petroleum companies throughout the world submitted their tenders through Fugro Data Solutions.’ However it was revealed that only three companies namely Cairn India (Pvt) Ltd (CIPL) (blocks 2 and 3), ONGC Videsh (block 2) and Niko Cyprus (blocks 2, 3 and 4) had submitted 6 bids. The Minister of MPPRD when questioned at a press briefing why other companies did not bid stated, ‘the companies showed interest but a few companies bid but I don’t know why’. At this briefing the Minister stated that the Cauvery basin will be blocked and bids called soon. However this has not happened.

The background of the three companies and the reasons why the major players did not bid were given subsequently (Sunday Times FT - February 10, 2008). Although bids were called for three blocks and 6 offers received, the government decided to evaluate only block 2 where all three competed. A Technical Evaluation Committee (TEC) and a Cabinet Appointed Negotiation Committee (CANC) were appointed to evaluate offers and recommend to the government the award. Pertinent comments on evaluation of bids were published. It was also revealed that Fugro did not participate to advise the TEC and CANC on objections raised by the CB due to the fact that the local agent was also the same for CIPL.

The Government announced in June 2008 that CIPL was awarded block 2 for exploration and the Minister MPPRD stated ‘the Government had asked Cairn to coorperate with a Sri Lankan company. We don’t know which company they will choose. That is their business.’ Will the Minister now reveal the name of the company?

The PRA between Cairn Lanka (Pvt) Ltd (CLPL) and the Government was signed on 7 July 2008. The Minister MPPRD signed on behalf of the government in the presence of Neil De Silva, the DG PRDS, a Canadian citizen and three officials (all three Indian citizens) signed on behalf of CLPL. It was CIPL which responded to the invitation to bid and negotiated with the TEC as well as the CANC. However the PRA was signed by a separate legal entity. The memorandum and articles of association of CLPL should be in the public domain. Moreover there should be a binding agreement between CIPL and CLPL spelling out the technical and financial support provided in terms of the PRA. CLPL should divulge the members of its governing board and the location of its Head Office for public interest.

I shall now deal with the PRA and the three Phases of exploration the CLPL agreed to. In Article 5.1 the contractor, CLPL shall commence petroleum operations not later than 6 months from the ‘effective date’ i.e. the ‘later of the date the parties execute this contract (7 July 2008) or the date of issue of the exploration license (according to DG PRDS October 2008). The delay in issue of license is that it is not provided in the Petroleum Resources Act and the minister was compelled to issue it. Accordingly exploration should have commenced in Aprl 2009. Therefore CLPL is in default.

In Article 5.2 the work programme under phase 1 is defined and in Article 3.3 this phase has to be completed in 3 consecutive contract years i.e. by April 2012. The work involved includes 1000 sq km of 3D seismics, 5,000 km of 2D seismics reprocessing data, 5,000 km of gravity and magnetic and other surveys at an estimated cost of US$45 million. There is also a commitment to drill 3 exploratory wells at a cost of US$35.5 million. Accordingly the total cost of phase 1 is US$112.1 million.

The second exploration phase will be 2 years and if continued will end in 2014 or 2015 if there are no interruptions. The cost of the second Phase will be US$25 million. The third Phase will commence in 2015 or 2016 at a cost of US$35.1 million and is scheduled to end by 2019. The anticipated total cost of exploration given in the PRA will be US$172.2 million for the total of 8 years.

Accordingly CLPL will know whether there is oil only in 2020 and it will take at least another 5 years i.e. in 2025 (15 years from now) for the first barrel of oil to flow from the Mannar Basin.

The issues of public interest* that the Government should answer are:-

- Recent news items in the international press have stated that CLPL will invest only US$10 million for exploring the block whereas the commitment under Phase 1 is over US$112 million in the PRA. It is expected that CLPL should spend this amount and if not, it will be in default. Was the Government informed of the drastic reduction in Phase 1?

- Was approval obtained from the Cabinet to delay exploration from April 2008 to 2010? The CB admits exploration should have commenced in April 2009.

- A bank guarantee was given (Appendix G under Article 29 of the PRA) within 30 days from 7 July 2008. Did CLPL or CIPL sign the guarantee?

- Why was CLPL awarded the block when CIPL sent the original offer? As CLPL is an offshore company, CIPL the parent company is shielded from tax and legal binding in the PRA. This is similar to US companies having tax havens in Caymans Islands.
Did the Government place in the public domain the memorandum and articles of association of CLPL and the memorandum of understanding (if any) between CLPL and CIPL to provide technical, financial and operational support for exploration as stated in the PRA?

- It has been reported the CLPL and the BOI entered into an agreement on 12 September 2008 after signing the PRA for a commitment of an initial investment of US$110 million towards exploration of hydrocarbons. Will the BOI state that this was a section 17 Agreement under the GCEC law and are there any tax holidays and other concessions for tax free importation of equipment as well eployment of expatriates? Will the BOI make public the Agreement signed? Can the BOI certify that US$110 million was brought to Sri Lanka at the time of signing the agreement?

- Has the government studied the BOI Agreement in relation to the PRA signed by CLPL and say that these two agreements are compatible?

In conclusion I must state that Cairn India has lost interest in the Mannar basin with its focus on the commencement of production of oil in the Mangala field in Rajasthan which was discovered in 1994. The three fields Mangala, Bhagyam and Aishwariya (MBA) will produce 175,000 barrels of oil per day (BOPD) and meet 20% of India’s crude oil demand.

Further its joint venture (JV) with ONGC will again dilute its interest in the Mannar block. It is anticipated that risk capital for the Mannar block will not flow until CIPL makes substantial profits from Rajasthan and oil prices show a significant upward trend. It was also revealed that seismic work in Mannar will commence together with such activity in the Palar basin in the Krishna –Godavari (KG) offshore area and further delays are anticipated.

In contrast to the above developments, the Minister at the MPPRD in a recent statement said ‘Cairn India is carrying out the exploration while the seismic surveys have been completed at a cost of US$10.5 million.’ It is high time that the Government make a clear statement as to the present status of oil exploration in Sri Lanka and enlighten the public on such a crucial project that will propel our economy to dismal heights if met with success.

In this context I want to point out that Timor Leste where I worked for the UNDP in 2002 has a population of only 1 million with oil reserves of 800 million barrels and natural gas of 12 trillion cubic feet and has emerged as a promising oil producing country in the world. Since July 2004, Timor Leste has pumped 110,000 barrels of oil per day (similar to Rajastan) from Bayu Undan the only producing field apart from other large fields that are now being developed.

The oil and gas wealth in Timor Leste is managed well and will drastically change the economy which is at present one of the poorest in the world. This proves that unless we have the correct policy to manage our natural resources it will not bring benefits to the country but will lead to unequal distribution of wealth which in economic parlance is termed the ‘Resource Curse’.

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

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