Business Times

Drilling for oil in the Gulf of Mannar

I refer to the news item in the Business Times last week headlined ‘Drilling Starts Next Year on 3 Oil Wells’ and wish to make the following observations:

The Petroleum Resources Agreement (PRA) between the government (GOSL) and Cairn Sri Lanka (Pvt) Ltd (CSL) was signed on 7 July 2008. It must be stressed that it was Cairn India Private Ltd (CIPL) that responded to the invitation to bid for the 3 blocks in the Mannar basin together with ONGC (Videsh) and Niko of Cyprus. Since all three parties had bid for Block No. SL 2007 -01- 01 (original Block 2) the GOSL evaluated the offers by appointing a Technical Evaluation Committee (TEC) and a Cabinet Appointed Negotiating Committee (CANC).

An offshore oil rig. Pic courtesy - jonesact.files.wordpress

According to the information available, CIPL had scored over the other two companies on the Guaranteed Work Programme as it was stated that 3 exploratory holes will be drilled to depths of 1,100 to 2,550 meters below the sea floor in water depths of 450 to 1,100 meters during Phase 1. The other two bidders did not include exploratory drilling in the first phase but included in the other two phases. However none of the bids was open in the presence of the representatives of the three bidders thus lacking transparency.

The next move by CIPL was to form a fully owned subsidiary CSL which was registered with the Board of Investment (BOI). It is not known what concessions BOI gave CSL.
Under the agreed Work Programme (WP), CSL has to carry out exploration under three phases with agreed time frames of 3, 2 and 3 years, respectively. CSL has the option of withdrawing from the entire PRA at the end of each phase without any further commitments.

My article in the Business Times on September 20 2009 traces the entire history of oil exploration in Sri Lanka from the 1970s under the title “The Saga of Oil Exploration in the Mannar Basin”. It was revealed that the Petroleum Resources Development Secretariat is headed by only one technical person, the Director General who is a Canadian national on a contract for 5 years with a salary of US$5,000 a month and is only a one man show.

According to the PRA the first phase of exploration which consists of seismic surveys (1,000 sq kms of 3D and 5,000 line kms of 2D) gravity and magnetic surveys (5,000 line kms) and other surveys costing nearly US$42 million had to be carried out. Further the 3 exploratory drill holes as stated above have been estimated at US$70.5 million making a total commitment of US$112.5 million.

Since the drilling will start only next year the total committed expenditure by CSL should be at least US$40 million up to now. Has the Petroleum Resources Development Secretariat (PRDS) now under the President kept track of the exploration and the expenditure incurred by CSL? Further there is provision under Article 6 of the PRA for the appointment of a Management Committee consisting of 6 members, namely 3 from the GOSL and 3 from the operator (CSL) and it is queried whether this committee is functioning and whether an audit has been conducted on the expenditure incurred by CSL up to date. Further is there a binding agreement between CIPL and CSL to conduct the exploration spanning for a period of 8 years under the PRA? Also shouldn’t CSL disclose the names of the Directors as it is rumored that two Sri Lankan directors from the local agent of CIPL are on the CSL board?

The first exploration phase has to be completed before 7 July 2011, according to the PRA. However it is reported that drilling will start only in 2011 and it is very unlikely it will be completed before the deadline. Further the WP has been modified by not carrying the 5,000 line kms of 2D seismic surveys and saving US$15 million. Even if an additional 500 sq kms of 3D seismic surveys were done according to CIPL, still CSL had saved at least US$3 million according to their own figures. This amendment to the WP even with GOSL approval is still unethical and will be a bad precedent and lead to loss of confidence in the GOSL by prospective upstream exploration companies when further off shore blocks are offered for bidding in the future.

In the joint declaration issued following last week’s state visit of President Mahinda Rajapaksa to India, it is stated that ‘The President of Sri Lanka proposed discussions on the matter of establishing a joint information mechanism on the possibility of oil and gas fields straddling the India - Sri Lanka Maritime Boundary. The Prime Minister of India assured the President of Sri Lanka that this proposal would receive the Government of India’s attention and the matter could be discussed further between the two sides.’

This issue (India - Sri Lanka Maritime Boundary) and oil exploration in the Gulf of Mannar was highlighted by me in a series of articles published in the Business Times. Immediate action should be taken to appoint a competent task force to initiate discussions with India on this matter before CSL starts exploratory drilling next year under the PRA signed in 2008.

Further non consideration of the maritime boundary agreement may cause a serious dispute with India if commercially exploitable oil or gas deposits are located on the Sri Lanka side of the maritime boundary. The non resolution of this boundary issue vis-a-vis offshore oil exploration was the main reason why the major international upstream oil exploration companies did not respond to the earlier call for bids although they attended roadshows.

Dulip Jayawardena, Colombo.

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