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Mirror Business recently met with Petroleum Resources Development Secretariat Chairman Saliya Wickramasuriya to discuss the latest developments in the country’s petroleum exploration front. Following are excerpts of the interview

By Indika Sakalasooriya

Q: When is the second licensing round starting?

Saliya Wickramasuriya

The second round bidding has not been launched yet, but has been announced.  It was announced to the industry and part of the business community who had been in touch with us.
The mail to the business community went out last Wednesday morning and the mail to the industry went from two different sources—there was a notification on February 8, sent out by our bid consultants, IHS, through their international network. About four to five thousand people subscribe to their alerts and it went as a mail shot to everybody.
But at the same time on Wednesday the 13th, we informed about 25 oil companies of different sizes who had been in contact with us over the last year. Many of them have visited us here and some of them have already bought our data. The launch date of the bid would be March 7, 2013 and it will be launched in Houston, our first venue of the road show we are planning. We have selected Houston at that time because it coincides with the week in which the industry’s premier oil conference called CERAWeek takes place. It is populated by the people at senior executive level.
Since we have been invited to speak at the event, we plan to announce the second licensing round there.   The road show is not going to be at the CERAWeek but at a venue not far away. We are using CERAWeek as an opportunity to reach at the highest level of decision makers in the industry.
Thereafter the road show will move to London on March 11th. We will carry out the road show until March 15 and then will hold the last lap of the road show in Singapore from March 18 to 22. At every venue data rooms will be run hosted by IHS and assisted by PRDS technical staff.

Q: So after that oil companies can bid?

Well, not really. Those interested will start compiling their bids.  The major event in publicizing the opportunities in Sri Lanka’s oil and gas sector will be held in Sri Lanka in the form of an E&P (Exploration and Production) Symposium about a month after the conclusion of the road shows.  It will be by invitation only. The event would be a much more focused affair as we hope to influence the decision by oil companies to select Sri Lanka as a potential destination because ultimately we want to showcase a little bit of the country as well.

The event will also be attended by a selected group of the local business community.  One of the objectives we have is to tie Sri Lankan interests with international businesses and that is very high up on our list of priorities.  We are approaching this in a very collaborative manner. We are not bringing in any onerous rules of regulations that require certain percentages or mandatory local representation. But we have strategic means of increasing the local content in the industry in a mutually beneficial manner that will come out in the Petroleum Resources Agreement (PRA).

Q: When exactly will the actual bidding process takes place?

Well….let me clarify first. There are some companies who already know a lot about Sri Lanka. Those companies are already assessing their prospects and doing their due diligence. There will be some companies who will come to the road shows to hear about Sri Lanka for the first time. Those companies have to start from the scratch and that process may take a few months as a lot technical and business due diligence may be required. That means after the road show we have to give enough time to those companies to do what they need to do.  So we are planning to run the bid round for five months or so, which is about a month longer than the normal industry practice. Another reason for this is because we are a new destination and we want to put more data on the market. We are currently acquiring some additional data such as airborne gravity magnetic data, 3D seismic data and reprocessing existing 2D data. They won’t be ready at the start of the road shows. The road shows are to show people what we have, what is to come and what the time frame is, so that they can start their work. Before they make their final decision we would like to have this new information on the table. So we have simply calculated the end of the licensing round period to include enough time for road shows, for companies’ work, for us to acquire data and process it and give it to those who want it and for them to have time to use it before they make their final investment decision. Therefore the bids are only going to be due in August-September and we expect at least 10 serious bidders.

Q: What are the blocks available for bidding?

There will be a publicly released block map within the next few days. We are still making few adjustments to it. The principle is that all of the Cauvery basin which is now divided into five blocks as opposed to the earlier map of 3 blocks will be on offer plus at least another five to six blocks in the Mannar basin, which is most of the Mannar basin. There are nine blocks in the Mannar basin and one is already operated by Cairn India, who won it in the 2007 bid round.

Q: What about the two commitment blocks given to China and India?

The history of those blocks is that they were offered some years ago as acreage for potential collaboration in E&P. And it was the decision at the time to offer India and China two blocks on a government-to-government basis. There wasn’t really any take up of that offer at the time, and recently there has been interest expressed by several other companies in all blocks. So those blocks at this point are treated the same as any other block.

Q: So those two blocks will also be on offer in this licensing round?

Yes, very possibly. So there could be a total of 10 to 11 blocks that will be on offer. We may not offer all the blocks in the Mannar basin for reasons other than that. It’s because some of them are in very deep water, with very little information gathered from them.

But at the same time, we are introducing the concept of joint study acreage, for which we have earmarked certain very large areas in offshore Sri Lanka in which there is no data at all and very little knowledge of subsurface conditions. It’s very deep, so production potential is in the future. But prospects are high and therefore long term potential is quite high. Those we want to bring to the market as joint study blocks where we encourage investment in research, data acquisition, information gathering and study jointly with the government.

So an interested company can apply for a certain block for specific reasons, and this application would be considered on the basis of the company’s prior experience in developing similar areas, reputation in the industry, financial capability, and proposed joint study programme. Upon approval, the company will sign an agreement which allows them exclusive rights to gather information in a particular place for a particular period of time.

They will then interpret their data and come to the conclusion whether they should proceed further or not. If they decide not to proceed further, that’s their business decision, and it frees the Government to release the block to others interested. If they do come up with prospectivity, then they should bring that to our attention and we then have a choice to either negotiate a production sharing regime with that company or block it up and bid, giving them the right of first refusal to match the highest bid.

That’s the broad outline of a joint study agreement and we feel that it’s very equitable. The biggest benefit to us is that it exponentially accelerates the information availability, the knowledge transfer, the capacity building in Sri Lanka’s professional community. Let’s say there are six blocks. That means there will be up to six capable oil companies working on those blocks concurrently engaging up to six teams of Sri Lankan geo scientists, which is of significant benefit to us because all of that will help to address the current information asymmetry between the operator and the resource holder. That is also most likely to come up in the second round bidding, although the JS blocks themselves will not be competitively bid.

Q: What kind of financial commitment are you looking at from companies who would bid in the second round?

Well, those are by definition going to be quite large because of the cost of doing business in the Gulf of Mannar. The well that is being drilled by Cairn at the moment is going to cost approximately US $ 70 million. Seismic shooting here is quite expensive, simply because of the mobilization and demobilization charges to Sri Lanka.
If you ask me a number, my expectations are quite high simply because in the presence of those significant hurdles in 2007 and 2008 we had a very aggressive bid of approximately US $ 112 million from Cairn. So going forward with cost of business increasing, I believe a commitment of let’s say three exploration wells,  3000 square kilo metres of 3D seismic data, you are looking at a couple of hundred million dollars per block in Mannar, although the Cauvery will be a fraction of this. These are what the general costs are in deep water basins.

Some blocks will require longer time before wells are drilled because more data has to be acquired and interpreted. Other blocks have sufficient propectivity to encourage 3D seismic shoots and a quick exploration well. So it’s hard to generalize, but we do expect a reasonable amount to be invested. Of course nothing of it comes directly to Sri Lanka as we don’t charge money for awarding blocks other than an upfront Signature Bonus, which is standard practice. We simply award the blocks primarily on the basis of the best financial commitment. But it will have a very beneficial impact on the economy indirectly.
But more than the income we do have certain expectations. We would like to have a group of significantly capable and high quality operators as we are looking at diversity and capacity.

Q: There were media reports that apart from India0n, Russian, Vietnamese and the Malaysian firms have already expressed interest to explore petroleum prospects in Sri Lanka

All of those countries have shown interest. Particularly the Indian firms which have a very detailed knowledge in the Cauvery basin. We have also had delegations from PetroVietnam and Gazprom. All of these companies have examined our data carefully, and current indications are that they are interested in what Sri Lanka has to offer.
In addition we’ve had several other international oil companies—independents, majors and super majors—who have approached us. I have to clarify that all of these relationships started on an unsolicited basis. Sri Lanka thus far has not actively marketed itself. But by virtue of the fact that there had been some success in a virgin deep water basin—such things are rare in the oil and gas industry these days—we have attracted attention on our own.

Now is the first time we are going to reach out to the industry and say look we want the best oil companies to work in Sri Lanka and we are prepared to offer an optimum working environment here, giving them efficiency, transparency, flexibility and speed of action. So in a nutshell we want the best in the industry to work here. Having understood that hydrocarbon potential exists in the Mannar basin, we want to find it fast because we want to produce it fast, because we need the economic boost to sustain our energy demand growth. So from that standpoint we are going to be an encouraging and enabling partner to oil companies and that’s the message we want to pass to the industry.

Q: What would be the licence regime like in the latest round of bidding?

There would be two kinds of licences. There will be shallow water licence which will have slightly different stipulations. And there would be more incentivised deep water licences. We are not going to take this PRA (Petroleum Resources Agreement) and apply to the Cauvery basin as there would be a more benign version. But in this particular one we are going to stick to the pretty much same license validity period of 8 years as we don’t feel there’s a need to change the time frame.

Q: What would be the ownership structure of the blocks that would be on offer?

The ownership of oil resources vests 100 percent with the state. The question is how we equitably reward the investor who has invested in producing it. The world is divided into two domains when it comes to the ownership structure of oil blocks. One is the contractual or production sharing regime and the other is the concessional regime. In developed countries, the state does not share in the resources. What they do is they license an operator to produce and that operator explores and produces at his own costs and makes a profit. The government taxes the operator under the normal corporate tax regime and derives income. Sometimes there may be a special petroleum tax regime.

In developing countries where the production sharing system originated, the state required some income for economic purposes but the state had no investment capacity. So they encourage investments but ask for a share in the production. There may be a light taxation element here as well.

So what we have here is a contractual regime like this. The basic terms of our agreement are that oil companies invest and produce and out of the production the state gets a share. However the production doesn’t start at high levels. It ramps up over a period of time. So in the early days, we allocate the majority part of the production towards recovering the investor’s cost of the preceding years of exploration and development. When production comes to a level where we have dealt with these costs, then the share starts tipping in favour of the state.

The current way in which we allocate that exact share is dynamic and not static. If you were to ask me how much they get and how much we get I can’t answer that question other than for a specific scenario. In fact in the current production regime we use an investment multiple where the numerator is net cumulative revenue and the denominator is net cumulative costs. As time goes on this ratio gets bigger. When the ratio is small we get the smallest amount of money—at the moment I think it’s 15 percent. When the ratio goes above a certain number we get up to 85 percent.  So that split depends on the costs and the revenue to that point.
Now we are changing that slightly going forward. We are going to base the share on levels of production. We are taking costs out of the equation on both the top side and the bottom side.The key advantage in doing that is it incentivizes everybody to focus on production maximizing rather than costs.

Q: The Petroleum Resources Act is currently being amended. This was an initiative taken by the PRDS. What were the reasons behind this move?

There were several categories of reasons. I’ll start with the administrative ones. The way the current Act was put together, it has all the ingredients but in different places. It apportions a huge amount of authority and responsibility to an organization called the PRDC—Petroleum Resources Development Committee. There is no mention of the PRDS but it refers to a Secretariat that functions under the PRDC. Now what that does is, it places the whole administrative burden of the industry in the PRDC, which means that approval of the fairly mundane day-to-day tasks should go to PRDC. Let alone being cumbersome, it’s almost impossible considering that the PRDC consists of Secretary to the President, Secretaries of Finance, Defence, Fisheries, Environment, Petroleum Industries, etc. It’s impossible as a committee to get those distinguished people together more than twice or thrice of and year. So from that standpoint there was a big administrative need to tidy up.
We managed OK with a single operator operating one block. But when we have 10 operators in 10 blocks with 15 to 20 wells we don’t want the administrative system to fail. So in the amendments what we have done is we have clearly allocated responsibilities to PRDC and the PRDS, delegation of authorizes and functions and powers, in order to achieve administrative convenience as well as our second objective. That is good governance.

The three functions of policy, regulation and operations need to be clearly separated in any industry for good governance. The oil industry is no different. In the new amendments, the Policy responsibility rests with the PRDC, who represent through the involved line ministries, the ultimate resource owner - the people of Sri Lanka. While the PRDS is subordinate to PRDC in terms of organizational stature, and will follow policy directives accordingly, it will be an autonomous body with its own board and statute. This will enable it to perform regulatory functions independently.  The PRDC represents the nation’s conscience, political alignment, and economic interest with respect to managing the petroleum resources off shore. The PRDS will manage the business on an administrative level.

The third point of the triangle is the operator. We still don’t have a national oil company. It is a step that we have to take at the appropriate time, but we have put in place its responsibilities ahead of time. It’s not appropriate either the PRDC having defined as the policy maker or PRDS having defined as the regulator should operate.
When the Act was put together, it was put together with the best intentions but in a non-operating environment. It’s only by using the Act that the deficiencies, ambiguities, overlaps and vagueness have surfaced. So by amending the Act, we have cleared all of that up.

Q: Would it be gas or oil for Sri Lanka? In a recent interview with Mirror Business, Cairn India Director Sunil Bharati said that the Mannar basin has greater potential for oil.

Sunil knows what he is talking about. Apart from the fact that he has been here for a long while, he is a petroleum geo chemist. Such people are the ones that make such pronouncements. So I’m absolutely not going to challenge him or qualify his observation.  My only comment would be that the Mannar basin extends to different depths and different ages and possibly different source rock in different places. So there is the potential that there are accumulations of hydrocarbon which are a from a different maturity window. Even in the gas that was found in Cairn’s two wells, there is condensate. This indicates that possibly somewhere there is a window for oil. We hope we can find it.

Q: What kind of challenges do you envisage for a future Sri Lankan oil industry?

In one word I would say infrastructure - physical and institutional. Finding oil and gas in an established or mature basin is challenging but not as challenging as here. Finding oil and gas out in there poses the question how do you get it out of the ground and get it to the shore. If it’s gas it’s even more complicated. So everything we do as a country should be focused on getting it out of the ground. Having it and talking about it won’t achieve anything. And when you produce you have got to produce scientifically. There are countries around the world that have produced too much too soon and destroyed their reservoirs. So we have to wise ourselves up with the knowledge and experience that is available and make use of the natural resources that we are gifted with smartly.