After struggling for more than two years to monetize offshore gas reserves discovered in Sri Lanka’s Mannar Basin, Cairn India has decided to pull the plug and write off over US$200 million spent to search for offshore oil and gas in Sri Lanka.
Falling global oil prices was the last straw that broke Cairn India’s resolve.
Global oil and gas companies are going through a torrid time. Low oil prices have resulted in industry-wide dip in earnings and layoffs. Cairn India is no exception, and the search for oil and gas in Sri Lanka’s deep waters is no longer an attractive option. The company has conveyed its decision to pullout by the end of this year.
Sri Lanka had frustrated Cairn India for years with politicians and bureaucrats foot dragging to formulate a gas policy and negotiate a price.
Vedanta Group’s takeover of Cairn India sealed Cairn India’s fate in Sri Lanka. Sources said Cairn India had been bullish on Sri Lanka but its new owners were risk averse, being a mining company. Offshore oil exploration is a costly affair that gets more expensive the deeper one drills.
Cairn India has agreed to help Sri Lanka find its replacement and sources said Sri Lanka stands to lose billions of dollars by delaying the monetization of gas. It is believed that any company willing to take Cairn India’s place could expect a speedy resolution.
Several oil majors have war chests to survive such boom-and-bust cycles and several of them are investing in exploration while others cut back. The key is to attract these players.
According to an economic impact study by the energy ministry with inputs from the Petroleum Resources Development Secretariat, Ceylon Electricity Board and National Transport Commission, Cairn India’s gas discoveries could give Sri Lanka an economic benefit of US$ 200 billion by 2040.
“The more we delay to commercialise this resource, the more of this benefit we would lose,” the government’s oil and gas exploration secretariat PRDS’s Secretary General Saliya Wickramasuriya said. He suggests that Sri Lanka should not waste much time haggling over price should a company decide to take over from where Cairn India leaves off.
The previous regime did not take the oil and gas exploration activities seriously enough with top bureaucrats blocking efforts to pass a national gas policy and enter into joint-study programmes to search for petroleum resources off the country’s coast. But the interim government is applying itself to the challenge.
The Sri Lanka Energy Sector Development Plan for a Knowledge-based Economy 2015-2025 aims for a 100% self-sufficiency rate by 2030 with a heavy dependence of renewable sources and the gas discovered by Cairn India in the Mannar Basin has been factored into forecasts and action plans.It proposes to increase electricity generation from 4,050MW to 6,400MW by 2025 of which 1, 000MW is expected to be produced from the Cairn discoveries by 2020. 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 downstream 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 US$ 350 million.
The PRDS has proposed that gas could be exported to India.
Several oil majors including BP, Chevron, ExxonMobil and Shell have shown interest in Sri Lanka’s offshore potential with teams visiting the data room of the PRDS in Colombo over the last few years. French oil major Total SA has been trying to enter into a jointstudy programme with Sri Lanka for several years.
The interest is in part due to the island’s geographic location nearly 200 million years ago, in the heart of super continent Gondwanaland. Countries that had occupied the same fault line as Sri Lanka back then, have proven oil and gas reserves with India making discoveries in the recent past, and Mozambique making the biggest gas find of the century with around 100 trillion cubic feet.
The PRDS has estimated that the Mannar Basin could hold 9 trillion cubic feet for gas and 5 billion barrels of oil.