Financial Times

The search for oil and gas in Sri Lanka
By Dulip Jayawardena
The Secretary, Ministry of Petroleum Resources Development in the media recently announced that the government will soon call for international tenders to prospect for oil and gas.

The areas identified with positive signs of commercially exploitable oil and gas reserves are the Cauvery basin an extension of sedimentary rocks off shore from South India to the Palk Straits which has 25 per cent of such geological formations. The extent of this area was not given. The second promising area named as the Mannar basin is claimed to extend from Mannar to Hambantota, an off shore area of 35 000 sq. km about half the land area of Sri Lanka. I will not challenge the validity of these statements but would like to state that water depth would be a major impediment in the exploitation stage.

But an attempt is also made to highlight the duplicity of the activities of the DE COM (Delimitation of Continental Margin) Project with the aspirations of the government in calling for international bids for the off shore exploration.
Contrary to views expressed by others it must be stated that such activity is complimentary with the oil and gas exploration attempts of the government and a very close coordination mechanism should be established between these projects.

The Petroleum Resources Act No.26 of 2003 provides for the exploration and recovery of petroleum resources in Sri Lanka. However I am not aware whether the regulations in relation to this Act have been made effective.
The Act consists of five part namely — Part 1 Ownership of Petroleum Resources where the absolute ownership of petroleum resources on land and on the sea bed is vested in the state.

Part 2 relates to the Establishment of a Petroleum Resources Development Committee (PRDC) comprising the Secretaries of Petroleum Resources, Power, Energy, Finance, Environment, Fisheries Ocean Resources, Defence, and Chairman BOI, a nominee of the Ministry of Policy Development, and a nominee of the Petroleum Ministry.

This committee consisting mainly of administrators without much technical knowledge will be a hindrance in decision making and I would suggest that the Act be amended to include a maximum of five members including highly qualified and competent technical personnel as desired by the government.

Part 2 also provides for the establishment of a Secretariat headed by a Director General of Petroleum Resources with provision for wide powers that the PRDC would assign to him.

It is suggested that the Secretariat of the PRDC should be adequately strengthened to include a highly competent multi disciplinary team consisting of geologists, reservoir engineers, economists with experience in petroleum resources development hydrographers, GIS experts, etc.
Part 3 relates to Petroleum Resources Agreement Exploration Blocks and Development licences.

There is provision for companies to enter into Petroleum Resources Agreements (PRAs) structured in the form of Production Sharing Agreements in other countries. The selection of parties will be by the Cabinet on the recommendation of a Cabinet Appointed, Negotiating Committee or the PRDC. It is stated that each PRA shall be related to only one exploration block. However if such discoveries straddle between two blocks or are indicated in part of a block there is provision of entering into a PRA individually by one party or as a group in the form of a consortium.

The Cabinet could determine additional conditions for a PRA related to compensation to a person adversely affected by exploration which could include other uses of the ocean.

There are default clauses to be evoked by the PRDC as well as right of appeal for the contractor including arbitration. The government has provided for the acquisition of any property movable or immovable for petroleum operations under a PRA with compensation paid by the contractor.

It is imperative that the determination of compensation should be by the government as individuals will drag on this issue with foreign contractors as evidenced earlier in the 1980s on large scale gem mining projects.
Part 4 concerns the functions of the Secretariat
There is provision for the Ceylon Petroleum Corporation staff to be appointed to the Secretariat of the PRDC. It is suggested that the entire staff in the oil exploration section of CEYPTCO should be appointed to the Secretariat as these specialized officers will be an asset. It is also suggested that foreign oil companies should train local staff on –the job and such arrangements should be included in the PRA.

Part 5 covers the fiscal provisions.
There is provision for adjustment of the PRAs to reflect any future increase of taxes, fees or levies. This insulates the contractor from a future government’s arbitrary actions on fiscal provisions.

There is provision for payment of royalty in cash or kind and bonuses such as signature bonus although not specifically stated in the Act.

Part 6 is general where this section contains amendments to present Acts and interpretations etc. It must be stated that a redefinition of the “continental margin” in terms of Article 76 of the United Nations Law of the Sea Convention as well as Annex 11 to the final Act is required in relation to the extended sea bed specially applied to the Bay of Bengal.

DE COM project
Much publicity was given over the last few years for a project initiated by the Foreign Ministry and the Ministry of Fisheries and Aquatic Resources to claim an extensively large area of sea bed beyond 200 nautical miles and the Exclusive Economic Zone on the basis of Article 76 and Annex11 of the final Act of the United Nations Convention on the Law of the Sea.

This arrangement is especially applicable to the southern extension of the Bay of Bengal in the Indian Ocean called the Bengal Sea Fan. An office has been established at NARA with funding from the Ministry of Fisheries and Aquatic Resources and the Foreign Ministry. A joint cabinet paper was submitted by the then Minister of Fisheries and the then Minister of Foreign Affairs for an allocation of Rs. 83 million as the local component and Rs.553 million as the foreign contribution to this Project. The foreign funding is from the Norwegian Government. A Sri Lankan who is now a naturalized Norwegian and the owner of a Norwegian company called Ocean Geo Resources was given a total of US $ 120 000 to formulate the above project by NORAD direct and his consultancy fee alone was over US $ 90 000.

The project was to demarcate the extended sea bed on the basis of the United Nations Law of the Sea Convention and Annex 11 of the Final Act.
It has been reported that much data has been collected on the sediment thickness over one kilometre in the off shore areas of Sri Lanka which could be claimed as our extended sea bed. Such data would be a great impetus to the government to get companies to bid for the proposed off shore blocks as sediment thickness is a contributory factor to the accumulation of oil and gas.
It is interesting to ascertain whether this information was made available to the Petroleum Resources Development Committee as it would greatly facilitate in calling for tenders on identified exploration blocks.

It must be stated that the general public has every right to know what is the progress on the DE COM project as public money has been spent.
There is hardly any transparency in the activities of the DE COM project and it is reliably learnt that the Norwegian government has now appointed the naturalized Norwegian who was a Sri Lankan mentioned earlier as a consultant to the DE COM project wih blatant disregard to conflict of interests.
The project had recently hired a Russian vessel to shoot seismic profiles in the area thought to contain sediments over one kilometre but the results are not known.

A committee headed by the Director DE COM meets regularly to assess the progress of the project and even some members leave aside the public are kept in the dark.

It is strongly urged that the DE COM project be brought under the Petroleum Resources Authority and a better coordinating mechanism be established between all stake holders and the ministries concerned.

Recommendations
The Petroleum Resources Act No.26 of 2003 spells out the modalities involved in calling for offers to carry out exploration activities with the main objective of detecting commercially exploitable oil and gas deposits in off shore areas of Sri Lanka. The Act also defines the parameters for exploitation of the resources on a production sharing basis with the government and the proponent.

The Act does not indicate relinquishment of exploration blocks. It would be more desirable to indicate such arrangements as included in other PSC s namely

— third contract year 25 per cent of area
— sixth contract year 25 per cent
— tenth contract year any remaining blocks not contained in discovery
The PRC should also include the quantity of crude oil or gas shared by the government and the Contract Operator. An indication of such arrangements are:

0–50 000 Crude oil Production BBL Per Day: Govt. 50 percent; Contract Operator 50 per cent

50 000 –100 000BBL Per Day: Govt. 60 per cent; Contract Operator 40 per cent

More than 150 000 BBL Per Day: Govt. 70 per cent; Contract Operator 30 per cent

Natural Gas: 50 per cent each to Government and Contract Operator
Such PRCs will entail recovery of contract operators on investment credit on exploration and capital costs being an amount of petroleum equal in value to 127 per cent of the amount of such costs incurred.

Further a quantity of petroleum equal in value to operating costs which will comprise- current year exploration costs

— current year depreciation (20 per cent straight line) of capital costs
— allowable but un-recovered operating costs incurred in previous years.
After deducting the above costs the balance of production will be split according to the above formula.

It is envisaged that if we strike an economically exploitable oil and gas deposit a reasonable return to the government will take over 5 to 7 years or more. The only income prior to this will be the royalty and if applicable a signature bonus. In conclusion it is stressed that the negotiation of contracts for oil and gas exploration and exploitation with the proponents should be carried out very carefully by a team of highly competent negotiators who should be recruited by the government.

The Director General of the Secretariat of the PRDC should be assigned this task. It is of paramount importance that the government spells out its policy on PSCs at the initial stage and hold a few road shows in foreign countries to attract risk capital for exploration.

It is hoped the DE COM project would come under the new PRDC and close coordination be established between these two entities.

Finally it is mandatory the Secretariat of the PRDC be adequately staffed with officials who should be exposed to off shore oil exploration and exploitation. It is suggested that the income accrued to the government by way of Royalty and signature bonus should be made available to strengthen the Secretariat.

(The writer is a retired Economic Affairs Officer who was in charge of the Marine Affairs Programme of United Nations ESCAP from 1990 to 2003. He has carried out research on the Timore Gap Treaty between Australia and Indonesia and later independent Timor Leste for exploration of off shore oil and gas deposits in the Timor Sea. He can be contacted on fasttrack@eol.lk ).

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