ONGC Videsh (OVL), the overseas arm of the state oil explorer has held initial talks with Cairn India for a partnership in Sri Lanka, where Cairn drilled successfully to announce the island’s first hydrocarbons discovery, Indian media reports said quoting unnamed sources.

A senior industry source was quoted by Economic Times as saying, “A final decision about how much OVL wants to invest or what kind of stake-holding it wants is yet to be taken but what is clear is that OVL is keen to pursue a long term partnership with Cairn in Sri Lanka,”.

OVL had submitted a bid with Canada-based Niko Resources for the same block in 2008 but was outbid by Cairn India. A source close to Cairn India confirmed that the two companies had begun preliminary talks.

“Yes, OVL of ficials have approached Cairn India to discuss a partnership in our Sri Lanka operations, but the negotiations are at a very initial stage. So, it is too early to comment right now as formal discussions about the exact nature of the partnership and investments are yet to be ironed out,” a source close to Cairn India had told Economic Times.

Cairn India operates the largest offshore oil block in India, and became the first company to discover oil and natural gas in Sri Lanka’s Mannar basin in the latter half of 2011. Cairn Lanka, a wholly owned subsidiary of Cairn India, is the biggest private exploration and production company operating in Sri Lanka with an acreage of more than 3,000 km in the frontier Mannar basin. It currently holds 100% interest in the Block SL 2007-01-001 in the Mannar Basin.

“Cairn Lanka’s successful drilling programme, the first in Sri Lanka in 30 years, has established a working petroleum system in the frontier Mannar Basin. Following this success, Cairn Lanka has notified the government of Sri Lanka of its intention to enter the second phase of exploration,” said the company in a recent statement.

“Cairn Lanka has completed the first phase of exploration campaign in Sri Lanka Block SL-200701-001. The exploration programme involved the acquisition, processing and interpretation of 1,753 sq km of 3D seismic data and a three well deep water drilling programme. This programme resulted in two successive gas and condensate discoveries,” added the company.

After the second round of drilling and surveys as part of its second phase operations, the company will decide on the commercial viability of the findings by the mid- 2013.

Analysts said Sri Lanka was the logical choice for ONGC. “Sri Lanka would make perfect sense for OVL as not only is the sheer proximity to India a major plus but also Cairn India already being active in the area is also a vote of confidence.

Another plus for OVL is that Cairn India and ONGC already have a good working relationship in the Rajasthan block,” said a senior market analyst that tracks Cairn India closely. Earlier this month, OVL bought US energy company Hess Corp’s stake in a producing Azerbaijan field and the Baku-Tbilisi Ceyhan (BTC) pipeline for $1 billion.