The Search for Credibility and Oil

Sri lanka’s oil sleuths need to restore credibility and make up for lost time

Sri Lanka’s top oil sleuth Saliya Wickramasuriya who heads the Petroleum Resources Development Secretariat (PRDS) says oil exploration company Cairn India last year made a major push but failed to attract a global partner for its operations in Sri Lanka. The company is leaving Sri Lanka and Wickramasuriya says Sri Lanka will not be able to find a replacement until a 2013 bid-round is finalised and credibility is restored.

In 2008 Cairn India, then part of global oil major Cairn UK, won the country’s first petroleum exploration license in the Mannar Basin off the western coast to prospect the seabed on a 3,400sq km area where water depths exceed 1,500 metres.

By the end of 2012, Cairn India had discovered two natural gas reservoirs totalling 2.3 trillion cubic feet. The PRDS’s economic impact modelling has estimated that this reserve would result in a US$200 billion benefit to the economy by 2040.

“In early 2014 Cairn India opened up a special Sri Lanka office or data room in London to attract a partner among the major oil companies.

Sri Lanka would have been a burgeoning hive of offshore oil exploration activity if the Treasury had not engaged in bureaucratic power-wrangling, undermining the PRDS at every turn

Several companies were interested in the gas wells and Cairn India bid for a second exploration license in the 2013 bid-round. But nothing materialized,” Wickramasuriya says.

Later that year Cairn India was bought-over by UK-based mining group Vedanta which decided to pull out from global petroleum exploration activities, partly in response to the oil glut which shook the entire global oil industry gripped in scale-backs, cost-cuts and staff layoffs. Cairn India was also frustrated in trying to finalise a gas deal with Sri Lanka with talks in deadlock since 2012.

Cairn India is officially leaving Sri Lanka in October 2015 and will write off US$240 million invested in the search for oil in the Mannar Basin.

“We are starting to talk to global oil companies about taking over from Cairn India, but if we want to cement our professional credibility and intent, we will have to evaluate and award bids received at the last bid round in 2013 and finalise the joint-study programme with Total first mooted by that company in 2012” says Saliya Wickramasuriya, a global oil and gas industry  professional who has been almost futilely swimming against Sri Lankan- style governance and bureaucracy.

“There are several parties like Exxon, Gazprom, Eni, and Shell who are aware that Cairn will be exiting, but we have not made a formal announcement to the industry as yet. There are many

things we need to do till then, including following all legal procedures by finalising the rights and obligations of each party into a comprehensive ‘exit’ file that prospective partners can scrutinise in advance of their final investment decision,” Wickramasuriya said.

He hopes to achieve several goals parallel to each other in order to attract Cairn India’s successor, most notably the passing of the new Petroleum bill, which aims to achieve greater efficiency and transparency to all parties.

Sri Lanka would have been a burgeoning hive of offshore oil exploration activity if the Treasury had not engaged in bureaucratic power-wrangling, undermining the PRDS at every turn. Sources said this had opened the backdoors to those in higher office, with oil companies seeking appointments with then President Mahinda Rajapaksa. This power- struggle cost Sri Lanka years of lost opportunities.

After Cairn discovered the gas res- ervoirs in 2012, the government rode the wave and called for bids offering exploration licenses in the Mannar Basin and Cauvery Basin off the Northern Coast. The bids closed in November 2013 but only two oil companies bid. Singapore-based Bonavista for two blocks in the North and a half-hearted bid by Cairn India for a block in the Mannar Basin.

The bid round was a disappointment. The PRDS has promised new seismic data, or three dimensional graphical representation of the seabed created by using sound waves. But the government had failed to approve a Cabinet paper authorising the PRDS to engage with seismic data acquisition companies.

The three bids were left unopened for two and a half years. Cabinet ap- proval to open and evaluate the bids was obtained only after the government changed in January 2015. With Cairn India out of the picture only Bonavista’s two bids remain. According  to Wickramasuriya, “Cabinet approval was granted recently, and the bids must now go before a technical committee for final Cabinet approval of their recommendation. We thereafter expect to sign a couple of oil exploration agreements within this year. Cairn India has agreed to assist in the location of a future partner in every way possible, because they would want to mitigate some of their losses.”

Wickramasuriya also believes the time is ripe to secure multi-client data acquisition surveys with the oil and gas services industry in overcapacity looking for work.

“Given the current dynamics of the global oil industry, few companies will be willing to take on 100% of the risk. The previous PRA’s fiscal terms were acceptable for more mature markets, but we have now adopted a mechanism that best suits our risk profile”

“Several such companies, such as CGG, Western Geco, PGS, Spectrum and ION Geophysical have formally expressed interest in conducting speculative (at their cost) surveys, and the study and recommendation to the Cabinet of Ministers is soon to be taken up for approval,” Wickramasuriya says.

The bidders for the country’s second oil exploration licensing round and data acquisition companies were not the only ones left to hang about for over two years just because the Treasury kept overusing the PRDS at every turn.In 2012, French oil major Total proposed to conduct a joint study programme with Sri Lanka. It will spend millions of dollars to gather three- dimensional data of the seabed off the east coast and return for exclusive rights to use the data for a specific pe- riod of time within which period they would be given the right to make a bid for an exploration block. This would have attracted the attention of other oil exploration companies; a major global player was showing real interest in Sri Lanka.

The Treasury blocked this move too. But Total has not lost interest.

“A final draft for a joint-study pro- gramme with Total approved by the Cabinet is currently being vetted by To- tal, this too is expected to be finalised before the end of the third quarter of 2015,” Wickramasuriya says.

Awarding a licence and conclud- ing the long-overdue bid round will not only restore Sri Lanka’s credibility but as Wickramasuriya holds it could send the right message to a depressed global petroleum industry.

The PRDS has changed the profit sharing dynamics in the second bid round from investment multiple to daily production basis. This changes the focus of production share from being cost-driven to being performance driven, and is expected to give oil companies a bit more comfort to invest hundreds of millions of dollars in the search for hydrocarbon deposits deep underground below thousands of metres of rolling sea waters.

Under the to-be-expired agreement with Cairn, the government could invest a 15% share in the project, but the new agreement formats will allow the government to take on a higher liability, which can be settled with future returns.

“In the current PRA (petroleum resources agreement), the government has the right but not the obligation to take up to a 15% stake in the operating interest of a given block, thereby becoming a partner in the joint venture operating the block. It has to exercise this right within 365 days of the PRDS accepting a Field Development Plan submitted by the operator. It can then, if it wishes, pay for its share of legacy costs out of future production, but will need to meet ongoing development costs on a current-cash basis. Hence the decision to become a partner has financial implications to the state and needs to be well planned,” Wickramasuriya says.

“A higher stake by the government, which will be taken by the yet-to-be-set up National Oil Company, will have higher cost implications to the State, but may be beneficial for investor confidence ” he clarified.

“Given the current dynamics of the global oil industry few companies will be willing to take on 100% of the risk. The previous PRA’s fiscal terms were acceptable for more mature markets, but we have now adopted a mechanism that best suits our risk profile,” Wickramasuriya added.

oileSuccessfully concluding the second bid round which commenced in 2013 and awarding a licence to Bonavista to explore for oil and gas in the North will also give players confidence to take over from Cairn.

Producing commercially viable gas discovered by Cairn India will be challenging and expensive: the Mannar Basin is deep and gas cannot be easily transported and stored like oil. The cost factor makes it imperative that Sri Lanka finds investors with the right risk appetite.

The country would need US$ 1,000 million for gas production and US$ 260 million to develop a gas pipeline from the basin to a power plant on the West Coast, Kerawalapitiya. Developing the country’s upstream and down- stream petroleum industry would require a total US$ 3,600 million the energy ministry has estimated. It plans to connect the electricity grid to India which will cost another US$ 350 million.

Domestic natural gas will take at least three to four years more to come to market. Finalising a national gas policy is crucial.

The PRDS has done all the preliminary work on this, including a broad cross-sectorial economic impact study that highlights the cost of deferring domestic production, but these initiatives did not receive any favourable response until after the change of government in January 2015, Wickramasuriya says.

“The current Secretary to the Treasury was the then Secretary to the Ministry of Petroleum Industries, and has done an excellent job of the form and structure of a new National Gas Policy. This project now needs to be completed and tested against industry norms and practices globally, as it will contain both investment protection and market direction, and will define Sri Lanka’s attractiveness in the up- stream sector” Wickramasuriya said.

The energy ministry under the former government formulated a National Gas Policy with input from the PRDS like it did with the draft amendments to the Petroleum Resources Development Act, which looked at policies of successful countries. The Sri Lanka Carbon Fund of the energy ministry conducted a study on the ap- plications for natural gas.

At low cost, some of CPC’s electricity generation plants could be converted to gas and transport was another sec- tor red-flagged as a ready beneficiary of gas along with industrial heating. Exporting the excess to India was identified as a major opportunity. The revenue from both gas fields was estimated at around US$12 billion.

Sri Lanka’s energy needs are expected to increase six fold by 2040. Although the previous government identified coal as a cheaper energy source around this problem, its own energy authority warned that 10-20% of the coal burnt ends up as ash, depositing ‘tonnes of toxic heavy metals in the soil and water table’.

The interim government also wanted a technical committee to be set up
to advise the Petroleum Resources Development Committee, which was formerly headed by Secretary to the President Lalith Weeratunga before the interim administration appointed energy ministry secretary Dr Suren Batagoda. The PRDC comprises several other secretaries such as those of the Ministries of Finance, Defence, Environment, Fisheries and Aquatic resources.

“We don’t have a lot of expertise on the ground, but do have a network of Sri Lankan professionals in the O&G space worldwide. We have a plan to enlist their services in our efforts to build capacity to finally be able to manage the industry locally, but a formal process to achieve this has yet to be defined,” Wickramasuriya said.

He said the technical committee was important because it provided independent professional opinion to be given to the PRDC, rather than them getting it directly from the PRDS and therefore being possibly influenced by one way of thinking.

The most important step to drive momentum in the country’s oil and gas search is finalising amendments to the Petroleum Resources Development Act, which will give the PRDS regulatory powers and independence, and foster transparency and public oversight

“If we are the only party influenc- ing government policy, then we are creating a situation where it may compromise our independence as a regulator. This independent technical committee is a good mechanism for governance and no ministry can exert undue influence through them. This is what we have envisaged for the future, particularly in the early stages of development”.

The most important step to drive momentum in the country’s oil and gas search is finalising amendments to the Petroleum Resources Development Act which will give the PRDS regulatory powers, independence and foster transparency and public oversight.

“We are getting there slowly. We were told by the Attorney General’s office recently that this was not a priority, and several other pieces of legislation needed to be finalised first. We understand this, and have to be patient. However, the new Petroleum Bill is not just a good thing to have but essential, we need this new act to de- velop the industry. Administratively, we can stumble along with one block and one operator, but if we are to escalate petroleum activity efficiently we need the new act” Wickramasuriya added.