ISSN: 1391 - 0531
Sunday, October 08, 2006
Vol. 41 - No 19
 
Front Page Financial Times
Financial Times

TGS-NOPEC must pay Sri Lanka; not the other way around

By An Oil Markets Analyst

Minister of Petroleum and Petroleum Resources Development A.H.M. Fowzie submitted a cabinet paper on September 27 giving the present status of off shore oil exploration and requested the Cabinet for approval to cancel the TGS- NOPEC agreement after a payment of US$ 10 million.

The urgency in pursuing this course of action is to award two exploration blocks to India and China after directly negotiating with these countries. But how can this be done when Part 3 of the Petroleum Resources Act No.26 of 2003 has no provision for such award of blocks as bids have to be called for all the blocks and the Cabinet is authorized to select the most suitable parties who have the technical and financial capabilities?

The TGS-NOPEC Agreement signed on February 13, 2002 is non exclusive but it gives the exclusive rights to TGS –NOPEC to market and sell the data to clients interested in carrying out oil exploration in the off shore areas of Sri Lanka.

The agreement contained an Annex titled “General Licence Agreement for the Use of Proprietary Geophysical Data”. This is a model agreement and under clause 7(a) says that TGS NOPEC owns or controls ownership rights in the data licensed. This is ambiguous as CPC although the owner of the data has no right to use or trade in the data. There are also disclaimers where TGS NOPEC and CPC are not responsible for any financial loss to the client by use of the data.

Accordingly a payment of US$ 10 million for absolute ownership of data should not be made. Further the termination of the agreement TGS NOPEC signed with the client is valid for 20 years whereas the CPC agreement will terminate in 2012. This implies that TGS NOPEC could trade the data for 10 years even after the CPC Agreement expires.

The CPC and TGS-NOPEC had a legally binding agreement to carry out both 2D and 3D seismic surveys on two areas under Phase 1 and 2. However the Maps included in the agreement covered the same area but the surveys under Phase 2 was more extensive. TGS NOPEC had exclusive rights to sell the data to all parties bidding for blocks in the Gulf of Mannar and even could sit on negotiating teams. Although the agreement mentions 3 D surveys there is no reference in the text. This itself is a violation of the agreement

Under the agreement, TGS –NOPEC has agreed to store all data in a secure environment in a tape storage facility that complies with CPC’s reasonable requirements. In this regard clauses 8.2 and 8.3 of the cabinet paper requested data storage facilities when it was the duty of TGS NOPEC under the agreement.

It is also stated that TGS –NOPEC stored Data with access information and has now hired Spectrum Data for studying and copying data. The CPC should have been informed about this change as TEG NOPEC had to store the data according to the Agreement. Further attention is drawn to Para 8.1 where the Director General of Petroleum Resources Development Secretariat had submitted a Report based on his inspection of the data in Perth from 20 to 22 September 2006 a few days before the Cabinet Paper. This document is not available but it is very unlikely that this officer could have carefully scrutinized all data including the results of all 5 sections specially section 4 elaborated above under the agreed Phase 1 and 2 that covered the Gulf of Mannar and its south west extension in a matter of 2 days!!!

The basic question that emerges from this Cabinet Paper is to what kind of data are we talking about its quantum and reliability as well as whether the surveys covered the entire area where the seismic profiles were clearly defined. We could also ask the question as to who has the data -- whether it is CPC, PRDC Secretariat or TGS –NOPEC?

If such data is not in conformity to the agreement then TGS NOPEC is in default. Further attention is also drawn to clause 7 of the TPG NOPEC Agreement in Para 7.1 where CPC was responsible to give all data collected from the Russian Surveys in early 1970s to about 1980. No costs were done on this data. Attention is drawn to Para 9 of the Cabinet Paper where TGS –NOPEC submitted a document containing conditions agreed with GOSL for he cancellation of the Agreement. It would be interesting if this document too could be in the public domain for transparency. However Para 8.3.5 shows an urgency to pay compensation to TGS NOPEC on the guise that British Gas and ONGC India has paid US $1 million each for data and they would recall the money if there is a delay in data acquisition This is quite interesting as British Gas and ONGC is exploring in an large area in the Gulf of Mannar adjoining the GOSL Blocks. In conclusion the government should not compensate TGS –NOPEC US$ 10 million which is over three times the operational costs as TGS –NOPEC has clearly defaulted the agreement.

If at all, the government should claim damages from TGS-NOPEC for violating the agreement. Moreover the agreement did not have a time bar and this delay caused the PRDC in calling for bids in 2003. Further the GOSL is committed to hire data management and storage companies when TGS –NOPEC should be responsible. Action by the government to pay compensation when the other party is in serious default is bad business practice and will be a bad precedence in the future.

Daham on the controversial pact

In fact, companies for oil and gas exploration can be selected by the government of Sri Lanka only on the basis of a transparent bidding process. (Sec 7.2 a,b. and c). Therefore it is incorrect to state that TGS-NOPEC has got exclusive rights or any right to explore for oil and gas.

Daham Wimalasena, former CPC chairman, has sent a statement relating to the recent dispute over the TGS-NOPEC agreement. Extracts of the statement:

Oil exploration activities under this government have come to a standstill mainly due to the poor appreciation of the nature of upstream oil industry in the world and also due to deliberate misrepresentation of facts to gain political mileage. Those responsible for this sad state of affairs are the officials now looking for positions of power in this government and they continue to mislead their political bosses. Based on this misrepresentation there has been repeated criticism by the JVP and JHU alleging that the UNP government has sold our oil resources to the Norwegians. In support they cite an agreement between CPC and TGS-NOPEC in February 2002. The real facts are as follows.

1. The Agreement between CPC and TGS-NOPEC was to give exclusive rights to TGS-NOPEC (a Norwegian company) to collect, interpret and market 2D and 3D seismic data at their cost and risk and make it available to companies who show interest in exploring for oil and gas in our territorial waters. (Section 4.1)

The terms on which the data is made available will be agreed with the CPC and will conform to internationally accepted terms and conditions. If the collected data is overpriced TGS-NOPEC will be the loser as they will not be able to recover their cost which may be estimated around Rs 800 million.

2. TGS-NOPEC is not a company that undertakes oil and gas exploration and they cannot do so under this agreement.

3. In fact, companies for oil and gas exploration can be selected by the government of Sri Lanka only on the basis of a transparent bidding process. (Sec 7.2 a,b. and c). Therefore it is incorrect to state that TGS-NOPEC has got exclusive rights or any right to explore for oil and gas.

4. TGS-NOPEC was selected in 2001 by the SLEP Government and the Heads of Agreement was signed in May 21 by then Chairman Mr Anil Obeysekara and Paul Gilleran of TGS-NOPEC.

The UNP administration continued to honour the agreement and undertook to implement the next phase, as it was in the best interest of the country to do so (Sec 1.1 and 3.1a). The government or the CPC could never have risked an investment of around Rs 800 million on this project.

Criticism during the last one year is also based on the anti-Norwegian stand of the JVP and JHU as regards the peace process. TGS-NOPEC operates entirely from Perth, Australia and their Head Office is relocated in Houston. USA.

(Business Editor’s note - the financial statements of TGS-NOPEC for 2005 states that the parent company of TGS NOPEC Geophysical company ASA is located in Naersnes, Norway main subsidiary is in Houston U.S.A).

More recently senior officials of the government have accused TGS-NOPEC of breaking the agreement. They claim that TGS-NOPEC has not delivered the data collected to CPC and that they have sold some of the data to a third party. I was very reliably informed by the two officials who handled this subject that TGS-NOPEC has not broken any contractual obligation and that it could be verified by inspecting documents in the CPC and Petroleum Resources Development Secretariat. This problem has arisen because the two officials in charge of oil exploration were not consulted. One of them died recently and the other was unceremoniously removed.

Though we don’t expect political heads of ministries to be well versed in the subjects assigned to them the incumbent minister of petroleum resources judging by his words and deeds, appears to have been overwhelmed by the instructions and advice given by his Secretary.

Extremists in this country see a connection between the TGS-NOPEC agreement and the Norwegian role in the peace process. I will agree if they were allowed to drill for oil. But they have no right to drill for oil and gas. What they undertook to do under the agreement was only to conduct seismic surveys at their risk and cost.

The Petroleum Resources Development Secretariat has expressed the view that the agreement with TGS-NOPEC is one sided and the Attorney General has not been consulted. This is typical of an ignorant and irresponsible official who is more keen to hit the headlines. Firstly the Attorney General was consulted no less than on six times before the final draft was prepared. Secondly, if the agreement was one sided there is a good reason behind it.

We had no choice to do better. About 30 companies were listed to submit offer for conducting speculative sesmic surveys but only three companies responded. Of these three companies TGS-NOPEC agreed to conduct the survey at their own risk and cost. All other companies were not interested and wanted up front payment.

This shows once again that Sri Lanka’s offshore area was not considered a worthy source of oil and gas even as late as 2000. As TGS-NOPEC was the only company which was prepared to conduct the seismic surveys at their cost, no one can say that it was a pay off for Norway being the peace brokers.

The open bidding round was originally scheduled for last quarter of 2004. Now we are in last quarter of 2006 and I am sure it will take another six months to even call for offers provided that right decisions are made by the government.

 
 
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