Oil exploration – the battle begins

I refer to my letter to the Minister of Petroleum and Petroleum Resources published in The Sunday Times FT of September 16 where I have requested answers to 10 questions raised on the much publicized oil exploration in the interest of the general public.

There has however been no response from the Minister or the Director General (DG) of the Petroleum Resources Development Secretariat (PRDS) showing scant disregard for public opinion on an issue of great national interest. It only shows impunity to public concerns by the present ruling politicians and high officials who in some instances are not even Sri Lankan citizens.

Since the publication of my letter and the queries raised, the government conducted three Road Shows in London Houston and Kuala Lumpur. The Minister had attended the first two Road Shows and the Deputy Minister the last. The DG of PRDS had attended all the Road Shows. It may be questioned as to the need for the Minister and even the Director General to attend as the Road Shows were conducted by Frugo the company retained by the Government. Frugo has close contacts with TGS NOPEC that carried out the Phase 11 of the 2 D seismic survey on a cost-sharing basis earlier for Ceylon Petroleum Corporation in 2005.

The success of these Road Shows as stated by the Minister to the media is confusing. In one statement he had stated that nearly 200 companies had shown interest and in another only 40 attended. Finally it was revealed that only 11 independent and national oil companies showed an interest.

The Minister had also stated that some majors are interested but no names were given. These statements including the figures could be verified independently by the oil industry.

According to industry sources, the Oil and Natural Gas Corporation (ONGC) of India has rejected the block offered on a nomination basis.The reasons given are the “staggering” $100 million signature bonus and the lack of prospectivity. However ONGC sent officials to attend the Road Show in Kula Lumpur indicating their interest in the Blocks offered for bidding. It is reliably learnt the ONGC is keen on tying up with oil majors and bidding as a partner. It was also reported that ONGC is interested in negotiating another block on a nomination basis.

Further on October 13 a Sri Lankan official from the Petroleum Ministry had stated that there is “friction” between the two governments and Sri Lanka is not agreeable to change the block already offered. He reported that India has paid US$ 1 million for the seismic data in the Gulf of Mannar.

The Minister had stated, “ India’s drilling of oil on her side of the maritime boundary strengthens the possibility of striking oil in Sri Lankan waters.”

The 7th Round of Bidding opened in August 2007 by the Directorate General of Hydrocarbons (DGH) of India under the New Exploration Licensing Policy (NELP) where a total of 93 exploration blocks have been identified. It is interesting that none of these off shore blocks is closer to our maritime boundary dispelling the statement that our blocks are promising.

However as pointed out in my earlier letter what course of action will the government take if an oil or gas reservoir straddles the maritime boundary of the two countries? I would also draw the attention of the government that Bangladesh is going to call for offers for 27 off shore blocks in late 2007 under its 3rd licensing round.

These blocks are in a known gas bearing area and are more attractive that the deep water off shore blocks in Sri Lanka, which is in an unknown frontier region. Accordingly the government should realize that there is severe competition for oil and gas exploration dollars in the South Asian region and it will lose out badly insisting upfront payments whether signature bonus or deposits whatever the word you call it.

Recently it was reported that the Ceylon Chamber of Commerce organized a visit of Sri Lankan companies to Norway. The companies are JKH, Hayleys Advantis and the Maharaja Organization. These companies it was reported have a keen interest in emerging off shore oil and gas industry in Sri Lanka. I personally think it is far too premature for anyone to show any interest at this stage when you deal with a deep water frontier area which had no show of oil or gas by drilling exploratory wells for the last three decades. Moreover only 2 D seismic surveys have been carried out without any 3 D seismic surveys that would more accurately demarcate areas for exploratory drilling. Another factor to be reckoned with is that even with the most advanced technology in known oil or gas bearing areas one in 10 exploratory wells is productive. Are these companies interested in upstream or downstream development of the oil industry or both?

What was the criteria for the chamber to select Norway and not the UK or US? Is it because of Norway’s leading role in off shore oil and gas exploration in deep water as compared to the other two countries. Norway also has very close affiliations with the Indian government and is assisting ONGC as well as Vedesh its off shore arm in exploration for oil and gas in deep water blocks.

According to a cabinet decision this month approval was given to the Minister of Petroleum Resources Development to initiate action to conduct 2D seismic surveys with the objective of ‘testing” oil and gas deposits in the south western, southern, south eastern and eastern off shore areas. The total cost is estimated at US$ 6.5 million. However it was also reported that the Treasury has agreed to allocate Rs. 6.5 million for conducting off shores in Hambantota.

The Sri Lanka Permanent Mission in Geneva on October 16 also states that the amount is Rs. 6.5 million. I would like to ask the PRDS which figure is correct?

The Minister for Petroleum Resources Development has gone on record stating “our objective is to produce our own crude oil by the year 2010 through oil exploration in the Mannar Basin.” If so why is this great hurry to carry out off shore seismic surveys in the other areas that had been partly covered earlier? Is it because according to ONGC the Mannar basin is not promising or the Blocks are on the Indo- Sri Lanka maritime boundary? Another pertinent question to ask the Director General PRDS is that a total of US$8 million was paid by the government to TGS NOPEC for 2500 kilometers of 2 D seismic data under Phase 1 and 4602 kilometers of 2 D seismic data under Phase 11 completed in 2005 covering the south western off shore areas as well (Blocks 5 6 7 and 8). If a total of 7102 kilometers of 2 D seismic data is already available including the southwest why carry out the survey again in this region? This has relevance to my earlier query as to what are the off shore areas covered by the TGS NOPEC survey (Phase 1 and 11) and how much of data is with PRDS or the company Spectrum in Australia for which the government paid US $8 million?

I would again request the Minister and the DG of PRDS to respond to my earlier letter and also to answer the issues raised here. Further will the Minister or the DG PRDS in the interest of the general public answer the following?

1.How many oil companies both national and international attended the Road Shows in London, Houston and Kuala Lumpur?

2. Was ONGC given another block on a nomination basis and if not why?

3. Is it correct that India refused the block offered on a nomination basis due to the Sri Lanka government insisting payment US$ 100 million upfront as a deposit for the privilege and also due to the poor prospectivity?

4. What is the response of China on the southernmost block that was offered on a nomination basis?

5. Is there partly duplication of efforts on proposed 2D seismic surveys as TGS NOPEC carried out 7102 kilometers covering the Gulf of Mannar and the Mannar Basin under Phase 1 and 11 completed in 1975 and included the south western off shore area?

6.Will the PRDS clarify that the total cost of the proposed 2 D seismic survey is US $ 6.5 million or Rs. 6.5 million?

7. Has the recently concluded seismic survey by the Norwegian seismic contractor Scan Geophysical for Gems International to demarcate Sri Lanka’s continental margin with sediment thickness of over 1 kilometer also include the areas that will be covered with deeper penetration by the proposed 2 D seismic survey initiated by PRDS? Is so what areas could be promising for greater sediment thickness for accumulation of oil? The DG of PRDS is in the Task Force of DECOM and should be able to exclude areas that are not promising.

8. Is there close coordination between PRDS and the DECOM Project under the Presidential Task Force?

I feel that it is highly optimistic to get crude oil or gas by 2010 as it takes at least 5 to 6 years to develop a productive hydrocarbon reservoir by downstream development even if we are successful after drilling exploratory wells. If it is gas the development will be much longer.

This whole publicity should be dispelled as orchestrated political rhetoric without neither scientific nor economic reasoning. It is prudent for the government not to make any predictions until oil or gas is struck off shore and the assessment of the deposits are carried out for economic exploitation.

In conclusion I would like to remind the government that the major trade offs in the oil and gas industry are geological conditions weighed against fiscal terms and political stability. Even if the geological conditions are promising the other two will play a significant role for exploration risk.

It must be remembered that in deep water frontier areas like Sri Lanka even a production of 500 barrels of oil a day (BOPD) will be marginal or uneconomic. Accordingly Sri Lanka has to go a long way before getting oil or gas.

By Dulip Jayawardena, Retired Economic Affairs Officer, United Nations ESCAP. Email:fasttrack@eol.lk