Sri Lanka gets ready to tap offshore hydrocarbons resources

The offshore Mannar Basin has seen an influx of energy-related activity in the past decade. Since 2007 exploration carried out in Mannar – which is part of the Laccadive Sea and the Indian Ocean – has yielded evidence of considerable oil and gas deposits. As of early 2016, however, commercial production has not yet started, and Sri Lanka continues to meet its hydrocarbons demand through imports, primarily from Saudi Arabia and other Gulf countries.

This situation is widely expected to change as Sri Lanka’s government moves to open up the Mannar Basin and other areas to additional exploration and development activities by international oil companies (IOCs). In February 2016 Sri Lanka’s Petroleum Resources Development Secretariat (PRDS) signed a joint study agreement (JSA) with the French energy major Total SA, the third-largest oil importer in Europe, to explore two blocks off the country’s east coast. Plans are also under way to open up gas and oil blocks in Mannar to bidding by IOCs. These developments have the potential to spark a period of rapid expansion in Sri Lanka’s nascent oil and gas industry.

Challenges Ahead

The country still faces a number of challenges in this regard. The delay in commercial development of the country’s fossil fuels can be attributed to a variety of overlapping issues, a number of which have yet to be resolved. The rapid fall in the price of oil and gas on international markets since mid-2014 has been a major hurdle as well. Similarly, Sri Lanka’s new government – which took charge after federal elections in 2015 – has only recently formulated a comprehensive domestic energy policy. More fundamentally, Sri Lanka lacks the appropriate infrastructure to handle a rapidly growing hydrocarbons sector. With these obstacles in mind, most local players do not expect to begin reaping the benefits of offshore fuel deposits for some time to come. “The Mannar Basin discoveries will play a role, but more in the long term,” W K H Wegapitiya, the chairman of LAUGFS Holding, a leading Sri Lanka-based business conglomerate, told OBG in August 2015. “They need five to six years [to set up] processing arrangements for starters, and then pipelines and other infrastructure to spur domestic use.”

History Of Exploration

The Mannar Basin has attracted oil exploration since the mid-1960s, when Western and Soviet IOCs began to show an interest in the area. From 1966 through the mid-1980s foreign firms, in conjunction with the state-owned monopoly operator the Ceylon Petroleum Corporation, collected around 18,000 km worth of seismic data and drilled seven exploratory wells, with mixed results. The Sri Lanka civil war, which began in 1983, effectively put an end to this activity until the early 2000s, when the government awarded a series of exploration contracts in and around Mannar to a number of IOCs, including Norway’s TGS and the now-defunct US-based firm Western Geophysical, and to academic geologists. In 2002 Ray Shaw, a professor of petroleum engineering at Australia’s University of New South Wales – which had been hired by the Asian Development Bank to carry out analysis of exploration data collected in Sri Lanka – noted that “the Gulf of Mannar basin represents a new deepwater frontier region, which has [indications of] hosting significant hydrocarbon accumulations.”

Following a subsequent series of seismic data collection and analysis, in May 2007 Sri Lanka’s government launched the country’s first round of bidding for exploration rights in the Mannar Basin. A year later a contract was awarded to Cairn India, a wholly owned unit of the Indian mining firm Vedanta Resources, which is listed on the London Stock Exchange. Over the next seven years Cairn drilled four wells in total – three in 2011 and one in 2013 – in the SL 2007-01-001 block, which covers an area of around 3000 sq km in the Mannar Basin region. The first two wells – named Dorado and Barracuda – both yielded considerable natural gas discoveries and some smaller oil deposits. The third well (Dorado North) was found to be dry, while the fourth well – named Wallago, where drilling began in February 2013 – was eventually abandoned before drilling could be completed due to “a technical failure in the drill ship”, according to the PRDS, which heads Sri Lanka’s Ministry of Petroleum Resources ON THE WAY OUT: In mid-2015 Cairn announced that it planned to relinquish its exploration rights in the Mannar Basin and depart Sri Lanka before the end of the year, as part of a larger plan to shut down exploration operations in a handful of international markets around the world, due to the persistently low international price of hydrocarbons. From June 2014 through early 2016 the price of Brent crude, the international oil benchmark, dropped from more than $110 per barrel to around $30 per barrel, a decline of more than 70%. In October 2015 Cairn concluded exit negotiations with the government of Sri Lanka and closed down operations in the country.

In its seven years of operations in the island nation, Cairn spent between $215m and $235m on exploration activities, according the government. While details about the firm’s exit were not forthcoming at the time of publication, the firm was reportedly not charged a penalty for pulling out. Instead, the MPRD has retained ownership of Cairn’s seismic studies, which are estimated to be worth some $300m, according to the minister of petroleum resources management, Chandima Weerakkody. “We are at an advantage because we have all the data collected by them,” he told local media in October 2015. “We will go forward with the next step. We are going to expedite the international tender process.”

New Opportunities

Sri Lanka launched a second international bidding round for additional shallow-water offshore blocks early in 2013, when the government carried out road shows in the UK, Singapore and the US. That effort generated a small response, with two firms placing bids for just three of the 13 blocks on offer: Cairn bid on an additional block in Mannar, while Singapore-based firm Bonavista Energy placed a bid for two blocks in the Cauvery Basin, located offshore of Jaffna, the capital of Sri Lanka’s northern province. Tenders to explore six ultra-deepwater blocks off Sri Lanka’s south-western coast, as part of a joint venture with the PRDS, yielded zero bids. As of early 2016 the government had not awarded any exploration licences from the 2013 bidding round, due in part to Cairn’s subsequent exit from the country and the rapid decline in hydrocarbons prices, which began just six months after the round ended.

Since Cairn’s exit in October 2015, the PRDS has moved to initiate a new round of bidding aimed at attracting IOCs to participate in the country’s fossil fuel industry. “All the top oil companies believe that Sri Lanka is blessed with gas and oil,” Weerakkody told local media in late 2015. In recent years PRDS officials have stated on record that a number of the world’s largest oil companies – including Exxon Mobil, Royal Dutch Shell, Petronas, Total and Eni – have expressed informal interest in Sri Lanka.

This speculation was confirmed as fact in February 2016, when Total signed a two-year JSA with the PRDS. Under the agreement, Total is expected to carry out an aerial survey of around 50,000 sq km off the east coast of Sri Lanka, at a cost of some $25m, with the objective of acquiring data on as-yet unexplored areas. The JSA states that Sri Lanka’s government will own the data from the point of acquisition onward. Should a commercially viable deposit of oil or gas be discovered, Total has the right to negotiate a production-sharing agreement with the state. If an agreement cannot be reached within a stipulated period of time, the state may launch an international tender for the deposit, at which point Total would have the right to match the highest bidder and take on the contract for a set period. Total was expected to begin exploration work under the JSA by March or April 2016. With Cairn’s $300m seismic studies of the Mannar Basin in hand, the PRDS also expects to launch a new round of bidding for additional offshore work off the country’s west coast before the end of 2016.

Expected Benefits

If Sri Lanka’s efforts are successful, it will eventually become a hydrocarbons producer. Despite this prospect, the state, unlike many other active oil and gas economies around the world, does not plan to export its oil and gas output. Instead, it hopes to use domestic production to supply Sri Lanka’s power plants and, by proxy, the electricity grid, which relies largely on imported fuels at the moment. This shift from imported foreign fuels to local production has major implications for the nation’s trade accounts and economy. “If the power and energy sector is not competitive, you cannot be competitive in the global economy,” Indrajith Coomaraswamy, deputy chairman of the Pathfinder Foundation and advisor to the Minister of Development Strategies and International Trade, told local media in April 2015.