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Offshore Oil and Gas In Sri Lanka - The Way Forward

20 Jan 2015 - {{hitsCtrl.values.hits}}

The history of oil exploration in Sri Lanka dates back to 1966 and up to 1984 , Soviet and western companies concentrated on land and shallow off shore areas of the Gulf of Mannar which is the southern extension of the Cauvery basin of the Bay of Bengal .

During this period, 18 000 kms of seismic data and 7 exploratory wells were drilled. All were dry wells but three wells drilled in the Mannar Island by the Soviets encountered wet gas shows at several depths.Interest was again shown by US and Canadian companies after a flow of 1488 barrels /day of oil recorded from a test hole drilled in Cretaceous sandstone on the Indian side, 30 kms from a hole drilled on the Sri Lankan side south of the Indo –Sri Lanka maritime boundary.Legislative enactmentsIn 2004, The Petroleum Resources Development Act No 26 of 2003 was legislated and Petroleum Resources Development Committee (PRDC) and the Petroleum Resources Development Secretariat (PRDS) were established under the Act.

The PRDC has representation from relevant ministries and other agencies which was chaired by the Secretary to the President after the function of oil exploration was assigned to him from the Ministry of Petroleum Resources Development in 2011.Seismic Surveys –TGS NOPEC Non –Exclusive AgreementThe Ceylon Petroleum Corporation (CPC) awarded a contract to TGS –NOPEC (a Norwegian company) to carry out 2 D seismic surveys in the Mannar Basin in 2001.

Accordingly, during June –July 2001, 1100 kms of seismic data were recorded and processed by Western Geo. After detailed analyses of data by Dr. Ray Shaw, Team Leader from the University of New South Wales (UNSW) that had a contract from the ADB the funding agency for CPC , concluded that the “Mannar Basin represents a deep water frontier region , which has promising indications of having significant oil and gas accumulations”.

As a follow up to these findings, CPC presented the newly acquired data and interpretation from the Mannar basin at the South Asian Petroleum Society Conference (SEPEX) in Singapore in December 2001 , and as a follow up to the findings of UNSW , TGS-NOPEC carried out a further 8000 kms of seismic lines in the Gulf of Mannar.The data were acquired by t he Government of Sri Lanka (GOSL) for US $ 8 million after annulling the Non –Exclusive Agreement signed in 2006 as it was not favorable to the country.

First Bid Round -2007
With the success in nearby basins in India earlier and the results obtained from the seismic acquisition programmes in the Mannar Basin in 2001 and 2006 ,the GOSL launched the 1st. Mannar Bid Round in May 2007 to initiate oil and gas exploration in Sri Lanka ‘s north- western coast. Roadshows for the licensing round were held were held in London ,Houston ,and Kula Lumpur.

Six bids were submitted by the 31 January 2008 deadline by Niko Resources (Cyprus) all three blocks, ONGC Videsh and Cairn India. The three blocks attracted bids from all these three companies .However the GOSL decided to evaluate only bids for one block SL -200701-001 where all the three companies had submitted bids. This unwise move by GOSL resulted in loss of its credibility among E& P companies due to bad business practice.This move also resulted in losing the opportunity to collect relevant data on the other two blocks and evaluation of its potential for oil and gas which would have strengthened the attraction for future bids in the area.

Cairn India was awarded the block SL-2007- 01 -001 and the Petroleum Resources Agreement (PRA) was signed on 7 June 2008.Sri Lanka’s first ever hydrocarbon discovery was made after three years in 2011 when Cairn Sri Lanka, a wholly owned subsidiary of Cairn India discovered gas in two exploration wells.

The two gas/ condensate discoveries have been quantified with a potential reservoir capacity in excess of 2 TCF( Trillion Cubic Feet) of natural gas .Of the two discoveries the Dorado reservoir has been targeted for early production with 300 BCF( Billion Cubic Feet) of gas and 2 million BBL of oil which is smaller and targeted for early production after appraisal.

Further the larger Barracuda discovery needs further appraisal and quantification with detailed reservoir studies. Negotiations have been initiated by the GOSL with Cairn on monetization of the discovery with a pricing mechanism for gas for domestic use locally for generation of electricity in close coordination with the CEB in accordance with future projections. The infrastructure facilities such as pipelines for the delivery of gas to the power plants have also been studied and the advantage for a separate state or private entity or a JV to undertake such activity is now been debated.

Second Bid Round July 2013This Round included the offer of 13 blocks with 5 shallow water blocks in the Cauvery basin north of Mannar Island comprising a total area of 15,740 sq kms and 8 deep water blocks in the Mannar basin covering a total area of 40,038 sq kms.

Accordingly, the total area offered in both basins total 55, 775 sq kms which is nearly 85 per cent of the total land area of Sri Lanka.Further, the GOSL also offered for the first time six blocks in the unexplored deep water east and south of Sri Lanka to International Oil Companies (IOCs) to carry out geophysical studies and collect associated seismic data on a joint study basis.

The selected company will have two years to collect data and an option to negotiate with the GOSL an agreement for exploration and development of the blocks.The second bid round closed on 29 November 2013 and one bid each for three blocks (One block in the Mannar basin and two blocks in the Cauvery basin ) were received.

There was also a firm proposal by a very large IOC from Europe for the joint study in a deep water block in north east off shore area.
Environmental Impact Studies on Off Shore Gas ExploitationBase line studies related to environmental impact on living resources of the Mannar and Cauvery basins within the territorial waters of Sri Lanka have been initiated with emphasis on the impact of such activity on marine mammals such as whales, dugong, dolphins etc as well as fisheries.

To this end, Cairn Lanka has created an environmental escrow fund with an annual contribution of US$ 25 000 even before commercial exploitation.
Petroleum Resources Development Secretariat (PRDS)

The PRDS plays a critical role i n coordination of all functions related to oil exploration in Sri Lanka within an effective regulatory framework as formulated and directed by the main policy making body namely the PRDC chaired by the Secretary to the President thus emphasizing the paramount importance of discovering oil and gas reserves within the territorial waters of Sri Lanka for economic and social advancement of the country.

This task is further compounded with the claim by the GOSL on its maritime space which is 20 times its land area under the extended continental shelf.
With the appointment of a new Director General to the PRDS in 2011 after the function of oil exploration came under the President of Sri Lanka, significant progress has been made to the Secretariat with the shifting of its location to the heart of the city of Colombo. The PRDS is now fully streamlined and equipped with a modern data room with 3 D presentations of the basin studies and their hydrocarbon plays carried by a team of dedicated scientists specialized i n petroleum geology and geophysics and other applied fields .

Action has also been taken to obtain multi client data acquisition and processing surveys with the main objective to strengthen and value addition of the existing data bank at the PRDS.Further, in June 2014 PRDS compiled and published a monograph to highlight the socio economic benefits to Sri Lanka on Upstream Development of Hydrocarbons followed by the gas discovery.

It must be stressed that the present Director General of the PRDS who is highly qualified with years of experience in the international oil E&P industry has been very effective within a short period of 3 years i n directing his staff to work as a multi disciplinary team to expose Sri Lanka to leading world recognized IOCs such as Exxon Mobile , Total, Chevron etc on downstream as well as upstream oil and gas industry which has strong international competition with the discovery of shale and oil gas deposits in the United States and other parts of the world extracted by fracking using chemicals that have negative environmental effects.Further the prospect of oil and gas in the surrounding seas especially in the Bay of Bengal had increased this completion for the developing countries like Sri Lanka in the southern Indian Ocean.

The recent discovery of oil and gas across the Palk Strait as reported by the Directorate General of Hydrocarbons in India in the off shore Kanya Kumari region should further activate the interests of IOCs in our Mannar basin.Present impediments and way forwardSince the first discovery of hydrocarbons in Sri Lanka as gas condensate in well CLPL Dorado 91/H1Z in 2011, not much progress has been made in monetization of the gas find and negotiations for early production.

The finalization of t he evaluation and award of contracts on the three bids received under the second bid round and also the signing of an MOU on joint studies of the deep water block with a leading IOC from Europe in north east off shore has been delayed mainly due to the slow decision making process of the GOSL.

I reliably learnt that such delays were due to the various impediments experienced by the PRDS especially due to the non cooperation of the former Secretary to the Treasury who has misled the decision makers by unfounded fears of signing MOUs with IOCs and going into bilateral agreements with India for the Mannar and Cauvery blocks , not acting with the best interests of the country.

The above delays have frustrated the companies that are waiting for decisions by the GOSL on their bid proposals including joint studies. It is unfortunate that these delays have now coincided with the crash in the international oil prices severely discouraging E&P companies to invest in exploration in deep water frontier off shore basins.

However the long term forecast for oil and gas prices in the world market indicate that the prices will steadily increase since mid 2015 and definitely in 2016, when the shale gas and shale oil market dominated by US will be competitive with costs for fracking leading to high environmental drilling and processing costs .Accordingly, there will be competition with tight oil and gas and tar oil and major IOCs will look at frontier areas positively especially in deep water off shore for E&P that have attractive investment regimes as in Sri Lanka.

In order t o reap t he full benefits of our positive gas condensate find that is commercially exploitable ,I strongly urge the government not to make any changes to the PRDS and give every encouragement to the present Director General and his dedicated staff to work as a team so as to see the first barrel of oil and cubic feet of gas on our shore from the Mannar basin without further delay.It is also i mportant t hat t he GOSL expedites the signing of the MOU for joint studies in our deep water blocks in the east of the island as there is good potential for accumulation of oil and gas within the southern Bengal Sea fan that skirts our eastern seas.

It is also recommended that the amendments to the Petroleum Resources Development Act No 26 of 2003 be finalized so that there is no ambiguity on who will sign the Petroleum Resources Agreement (PRA) from GOSL earlier and I had to advice the PRDS that the minister in charge of the Petroleum Development Ministry can legally enter into this agreement.The PRA compiled for t he first bid round was a carbon copy of the Production Sharing Contract (PSC), under the New Exploration Licensing Programme (NELP) of India.

The present Director General of t he PRDS took the initiative in formulating a new PRA since 2012 as appropriate to Sri Lanka, but was not finalized specially due to the former Secretary to the Treasury who took a negative approach to the entire oil and gas exploration programme in Sri Lanka and according to reliable sources due to his conviction that such activity should be carried out on a bi lateral basis with sovereign states and in this case with India.

In conclusion , I strongly urge the GOSL to finalize both the amendments to the Petroleum Resources Development Act and the new PRA and expedite the evaluation of the three offers received under the second bid round in accordance with the above enabling instruments reflecting the legal and commercial regimes appropriate to Sri Lanka. This could be followed- up by negotiations with the proponents involved as well as signing of the MOU for the joint studies without delay as it has t aken over a year after the closing date for the offers.

The GOSL should recognize the hard work and dedication of the present Director General of the PRDS in identifying and establishing a sustainable regime for the E&P industry in Sri Lanka involving both complex downstream and upstream activity in accordance with international practice.I am a silent follower of oil and gas exploration in Sri Lanka from its very early stages in 1970 s and more critically since 2003 with my return to the country after my 15 year stint at United Nations ESCAP and with my last experience in East Timor where the off shore oil and gas potential is about 20 per cent of the entire off shore of south east Asian seas.

However, from late 2011 with the appointment of the present Director General, I am convinced that the exploration for oil and gas both off shore and on land is heading i n t he correct direction and GOSL should actively pursue such activity under his able direction .I also have i nformation t hat certain areas underlain by Miocene limestone in the Jaffna Peninsula are good targets for uranium mineralization interpreted from satellite imagery sent to me by an official in Australia .This information has been given to the Director General for effective follow up .

It is also encouraging and prudent that all matters related to energy, including both renewable and non renewable as well as nuclear, will come within one ministry and under the effective guidance and direction of a senior minister of the present government who himself is a technocrat with vast knowledge and experience. Since sustainable development of energy resources is of paramount importance to Sri Lanka for both economic and social progress , I wish the minister every success in this arduous task. I like to reiterate my availability t o give any advice to the GOSL, if requested, in its quest for sustainable energy security for the benefit of the people of Sri Lanka and the future generations.

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Offshore Oil and Gas In Sri Lanka - The Way Forward

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