India only player off shore oil exploration in Sri Lanka

The Sunday Times FT recently reported that three companies, Cairn India Ltd, ONGC Videsh Ltd and Niko Resources (Cyprus) Ltd have submitted six bids for oil exploration in Blocks 2 (3,338 sq. kms) 3 (3,572 sq. kms) and 4 (4,126 sq kms). When the newspaper asked the Minister of Petroleum Resources why other companies did not bid in spite of the vigorous road shows in London, Houston and Kuala Lumpur in September 2007 and where it was reported that "hundreds of companies expressed interest", the answer given is "I do not know".

Further the official government news portal of Sri Lanka on 22 October 2007 had reported that "200 petroleum companies throughout the world had submitted their tenders through Fugro Data Solutions of England". Fugro are consultants to the government for the bidding process. Before analyzing the reasons for non submission of bids by major players and why only three companies aggressively involved in oil exploration in India both on land and offshore that has sent in bids, it is intriguing to find out what happened to Block 1 which was awarded to ONGC India on a "nomination" basis.

The Economic Times of India quoting Reuters on 3 October 2007 reported that the ONGC Chairman turned down the initial offer due to the size of the bonus request that was "fantastic" and lack of prospectivity. However it was reported that ONGC Videsh purchased seismic data from TGS NOPEC for US$ 1 million as recently as December 2007 and have now bid for Block 2 keeping Block 1 for ONGC. It is curious to find out why the area is now "attractive" after ONGC rejected Block 1 offered earlier.

Here is a short profile of the three companies that submitted bids: ONGC Videsh Ltd (OVL) was formed during 1990's as the overseas arm of ONGC but the Board of Directors have no powers to make investment decisions or increasing the investment limit set at US$75 million or Rs.3000 million. OVL has equity deals ranging from $400-$800 and up to 2006, acquired 23 projects in 14 countries namely Vietnam, Russian Federation, Sudan, Iraq, Iran, Libya, Syria, Myanmar, Australia and the Ivory Coast. It is presently pursuing oil and gas exploration blocks in Algeria, Australia, Indonesia, Nepal, Iran, Russian Federation, UAE and Venezuela. Further OVL, a JV with Sinopec of China has acquired Colombian company Ominex from its parent company Fort.

Cairn India Ltd is a subsidiary of Cairn Energy PLC, an Edinburgh based oil and gas exploration company. Cairn India is 65 percent owned by Cairn Energy, now an autonomous business quoted on the Bombay Stock Exchange and National Stock Exchange of India, and has interest in a total of 15 offshore blocks in India.

Capricon Energy Ltd, another subsidiary of the parent company has assets in northern India, Bangladesh, Nepal, Greenland, Tunisia, Albania, Peru, PNG, Australia and the UK. Cairn India's main operations are in Rajastan involved in upstream development of the Mangala field which is presently producing 125 000 barrels of oil per day. Cairn, as operator has 70 percent equity and ONGC has the balance 30 per cent.

Niko Resources of Cyprus is an offshore company of Niko Resources of Calgary, Alberta, Canada with a strong interest in gas prospects worldwide. This, like most companies registered in Cyprus is most probably for avoiding tax. Niko Resources is developing 6 wells under the gas development programme of Krishna Godavari Basin with other JV partners. The company is also involved in offshore oil field development in the KG Basin where there is a targetedproduction of 35000 barrels per day.

From this information it is evident that the six bids received has a very strong Indian influence and the possibility of these companies forming consortia cannot be ruled out after the award of the exploration blocks.

Why not others?
The reasons are twofold as to why the majors kept away from bidding rounds.

1. Maritime Boundary Agreement with India signed in June 1974: In an earlier article published in this newspaper, I drew the attention of legal experts on the interpretation of the above agreement vis a vis Article VI and demarcation of the exploration Blocks where the western boundary corresponds to the maritime boundary. This clause states, "If any single geological petroleum or natural gas structure or field extends across the boundary referred to in Articles I and II and the of such structure or field which is situated on one side of the boundary is exploited in whole or in part, from the other side of the boundary, the two countries shall seek to reach agreement as to the manner in which the structure or field shall be most effectively exploited and the manner in which the proceeds deriving there from shall be apportioned."

I strongly feel that the total disregard to this agreement by the authorities in Sri Lanka kept away the majors, as they did not want to get involved in bi-lateral disputes.

2. Terms offered by Sri lanka on Production Sharing Contracts (PSCs): Upstream Magazine reported that a 35 percent tax from net profit, royalty fee for annual production revenue and allowing the planned National Oil Exploration Company to invest 10 percent in exploration activities were the conditions put forward by the government. Signature Bonds, Production Bonds and profit sharing ratio are to be considered in selecting bidders. In contrast the Ministry of Petroleum and Natural Gas of India has placed on the Internet all relevant documents for bids for the Seventh offer of Blocks under NELP VII.

By way of comparison some of the attractive features offered by India are up to 100 percent participation by foreign companies, no signature discovery or production bonus or 'bonds', no mandatory state participation and an income tax holiday for seven years from the start of commercial production.

India under NELP VII has requested companies to bid for 57 exploration blocks out of which 19 are in deep water. The bids are to close on 11 December 2008 after road shows in Mumbai, London, Houston, Calgary, Singapore and Perth.

India is pursuing a vigorous exploration and production of oil and gas throughout the world and special emphasis is paid to the region in the Indian Ocean within its territorial waters and those of its neighbors such as Bangladesh and Myanmar.

It will be most prudent for Sri Lanka to enter into JV agreements with India to explore for oil and gas in Sri Lanka's territorial waters as provided in Article 83 of UNCLOS. This course of action will tentatively resolve issues related to offshore maritime boundaries.

Another factor that deterred majors participating is the security situation in the area. It would have been advisable to have extended the closing date for the bids until June 2008 where the government could have cleared the areas of terrorist activities.