Cairn Energy PLC (CEPLC), the parent company of Cairn India (CIPLC), is calling for bids to hire one rig each for India and Sri Lanka to commence offshore drilling in October 2010 and January 2011 respectively. It must be stressed that the Petroleum Resources Agreement (PRA) signed by the wholly owned subsidiary of CIPLC namely Cairn Sri Lanka Pvt. Ltd. (CSLPL) on 7 July 2008 has three phases in the Exploration Programme (Article 5). Phase 1 includes 1000 square kilometers of 3D surveys and 5000 line kilometers of 2D seismic surveys, 5000 line kilometers of gravity and magnetic surveys, geochemical and bathymetric surveys and more.
It must be also noted that locating drill holes offshore has to be evaluated and determined after the seismic and other surveys outlined above are completed. Under Phase 1 there is provision to drill three mandatory holes. However, a recent news report states that CSLPL plans to drill two additional wells by hiring a drill rig or a semi submersible rig and the costs are US$250,000 and US$280,000, a day respectively. The total depth of the drill holes at 5000 meters per hole will be 25,000 meters in water depths of 200 to 1800 metres.
However the time factor for completion of the seven holes is not stated. It is now pertinent to mention the report in the India Business Briefs (IBB) of 11 June 2009 that ‘CSLPL will invest US$10 million for exploring the block.’ This will entail drilling only for 40 days without the cost for the other surveys. However the Likely Money Spent (LMS) for Phase 1 of the PRA is US$112.1 million which is over 10 times the total that CSLPL is now prepared to spend! In the Upstream Journal of 2 July 2009 it is reported that CEPLC has launched operations in Gulf of Mannar by issuing expressions of interest for a 1450 square kilometers of 3D seismic survey in Block SL-2007-01-001 together with a second expression of interest to carry out a 800 square kilometres of 3D seismic survey in the Palar Block PR- OSN- 2004/1 off Andra Pradesh in India. The total value of these two seismic jobs is US$73 million.
It is expected that these two surveys will commence in early 2010. However the Director General (DG) of the Petroleum Resources Development Secretariat (PRDS) had stated that the Mannar survey will commence only in April 2010 at the end of the North East monsoon.
It is now evident that there are three entities involved in oil exploration in the Mannar Basin, namely Cairn Energy PLC from UK (CEPLC), Cairn India PLC (CIPLC) and CPSL. However it is not known whether there are binding technical and financial agreements between CIPLC and CSPSL for the completion of at least the mandatory exploration Phase 1 of the work programme where there is a financial commitment of US$112.1 million.
From the international press reports, it is evident CIPLC is carrying out oil exploration in Mannar together with the Palar block of Andra Pradesh, India in partnership with Oil and Gas Corporation of India (ONGC) and Tata Petrodyne Ltd. It is also pertinent to mention that the Palar block had been allocated to this group as far back as 2004 by the Indian government and it appears that it took more than 5 years for exploration work to commence.
I would also draw the attention of the government to Article 5.1 of the PRA which states: ‘The Contractor shall commence Petroleum Operations not later than 6 months from the Effective date’ which was October 2008 when the exploration license was issued. Article 3.3 of the PRA states that ‘Except otherwise provided in this Contract, the term of the first Exploration Phase shall not exceed 3 consecutive Contract Years.’ Accordingly Phase 1 should be completed by October 2011.
However seismic and other surveys will commence only after April 2010 and drilling has to start after completion of these surveys. Therefore it is highly optimistic that the above target date will be kept by CSLPL which is liable to a breach of contract if the government has not agreed to an extension.
Under the Indian New Exploration Licensing Policy (NELP) there is provision for Predetermined Liquidated Damages (LD) for unfinished Minimum Work Programme which is not in the PRA. Further there was no bid bond as in the NELP. Therefore there will be no liability on the part of CSLPL if the PRA is not honoured. Another curious fact is that CSLPL and its parent companies have tied up the Mannar survey with a block in India and this was not revealed when it responded to the invitation to bid from Sri Lanka in 2007.
(The writer is a retired Economic Affairs Officer at the UN ESCAP. He could be reached at firstname.lastname@example.org).