Furore over Central Bank role in oil search

A major furore broke out last week between the Ministry of Petroleum and Petroleum Resources Development and the Central Bank (CB) over a move by the latter to set up a specialized research unit on oil exploration.

Minister of Petroleum and Petroleum Resources Development, A.H.M. Fowzie told The Sunday Times FT that he was unhappy with the role the Central Bank will play regarding oil exploration and development, amidst reports that the CB was called in due to concern over the way the Petroleum Resources Development Secretariat (PRDS) was being run. A Ministry official who spoke on the condition of anonymity said he believes that the CB wanted to form an advisory body because the PRDS and its top management have not been running the Secretariat efficiently by taking any steps to expand its functions over the years, recruit qualified expert staff and provide them with the necessary training.

"You must have people with the necessary background and properly develop the staff," he said. In addition, he spoke about the Production Sharing Contract (PSC) regarding offshore oil and gas exploration, saying it should be in the public domain in order to assess if any modifications are necessary and ways to improve it. Last week the CB placed advertisements in several newspapers, seeking expert staff in petroleum exploration and development such as economists, geophysicists, geologists and petroleum risk analysts. The advertisement said the government of Sri Lanka is taking steps to commence the exploration of petroleum resources that has been identified in the Mannar Basin.

In that context, the advertisement noted that it is clear that the successful exploration of petroleum resources would have an enormous economic and social impact on the country and therefore needs to be carried out in 'a highly professional manner while safeguarding the national interest.'

Fowzie said he didn't know what the CB is doing by calling for experts with only two years experience when the industry is at its infant stage. "We are doing what we are supposed to do by the Cabinet and carrying on with that work," he said. The minister also ruled out any coordination between the Ministry and the CB.

The advertisements by the CB comes on the heels of the Ministry announcement that three companies, Cairn India Ltd, ONGC Videsh Ltd and Niko Resources (Cyprus) Ltd, had submitted bids for the blocks on offer in the Mannar Basin for offshore oil and gas exploration, following several road shows held in 2007 in London, Kuala Lumpur and the United States.

Fowzie said he is still waiting for the recommendations of the Technical Evaluation Committee regarding the bids. It was reported this past week that Cairn India which previously submitted bids for Block 2 and Block 4 has now also put in a bid for Block 1.

Some economists feel the CB is already involved in too many things and should immediately refocus their attention on their primary monetary policy objectives.

Central Bank Governor, Ajith Nivard Cabraal said the CB is not involved in oil exploration but rather in research (See comments in box). Director of the bank's Economics Research Department, Dr P.N. Weerasinghe said the CB was asked to get involved at the request of the government of Sri Lanka. "Our role is as economic advisor to the government and we are doing independent research and giving advice to the government," Weerasinghe said.

The PRDS which comes under the Ministry had previously been responsible for research in oil exploration and development, the role which the CB is now taking over. Weerasinghe described the PRDS as the 'operational part' of the entire process which will include calling for tenders and entering into agreements with different parties and to that effect, is working very closely with the Secretariat.

A Ministry official who spoke on the condition of anonymity said he believes that the CB wanted to form an advisory body because the PRDS and its top management have not been running the Secretariat efficiently by taking any steps to expand its functions over the years, recruit qualified expert staff and provide them with the necessary training. "You must have people with the necessary background and properly develop the staff," he said. In addition, he spoke about the Production Sharing Contract (PSC) regarding offshore oil and gas exploration, saying it should be in the public domain in order to assess if any modifications are necessary and ways to improve it. (NG)

Central Bank Governor Nivard Cabraal responded to the following questions posed by the newspaper:

Why is the CB getting involved in oil exploration? Was it at the request of the government? What role will the bank play in this regard?

The Sri Lankan government is taking steps to commence the exploration of the petroleum resource that has been identified in the Mannar basin. In that context, it is clear that the successful exploration of the petroleum resource would have an enormous economic and social impact on the country, and hence the effort needs to be carried out in a highly professional manner while safeguarding the national interest.

In its capacity as the economic advisor to the government, the Central Bank has diverse group of experts in its staff. The Monetary Law Act provides for the bank to recruit and sponsor training of technical staff in the areas of economic importance. Accordingly, over the years it has recruited and trained officials in core subject areas of Economics, Statistics, Banking, Finance, Accountancy, Management etc. As required, the Central Bank also has trained staff in specific subject areas such as agriculture, industries, foreign trade, banking and commercial law, project financing, micro-finance, rural development, infrastructure services, etc.

In that background, we are now preparing to assist the government in its debut petroleum exploration. To do so, the Central Bank intends to build its own capacity to render advice to the government so as to enable the country to reap optimum results in the oil exploration effort.

Accordingly, the Central Bank has decided to secure the services of several professionals/experts in various fields to supplement its team to undertake this advisory role in a meaningful manner. The selected professionals/experts would be expected to analyse and interpret data, assess exploration and production risks and opportunities, evaluate financial modalities, offer policy advice and generally to provide support and advice to the group that has been already established within the bank, to undertake this task.

What will happen to the PRDS if the Central Bank takes over in assisting the government in oil exploration and development?

As already mentioned, oil exploration and development will be one of the most important initiatives that Sri Lanka has ever undertaken. Towards that end, having several institutions advising government and submitting professional points of view would be of immense benefit to the country. The bank has already carried out a preliminary study and submitted a report to the National Economic Council at its meeting on January 25 proposing a way forward strategy. At this meeting, the bank was requested to actively assist in the initiative as well. Accordingly it would offer policy advice, economic analysis, and research and risk analysis. Such advice would serve to improve the processes that are already in place. The work carried out by the Central Bank would be of use to the government and the PRDS. The Secretariat would continue in its current activity without any change and it would be responsible for the implementation of the oil exploration activities. At the same time, the bank would develop research data and other statistical information in relation to this subject so as to improve the overall process.

It is therefore clear that we would play only an independent advisory role at the macro-level, including the economic matters related to oil exploration. Hence, the Central Bank's efforts would have no contradiction with the work that is being carried out by the PRDS.

Expert says duplication of efforts by the CB

An expert in offshore oil and gas exploration told The Sunday Times FT that the efforts of the Central Bank in establishing an independent research wing on petroleum exploration is in fact a 'duplication of efforts' because the Petroleum Resources Development Secretariat (PRDS) has already been vested with some of the same responsibilities through the Petroleum Resources Act No. 26 of 2003, particularly pertaining to research.

Section 5 the Act states that the Petroleum Resources Development Committee (PRDC) shall be assisted by a Secretariat (PRDS) headed by the Director General of Petroleum Resources. The current Director General, Dr. Neil De Silva's contract which was due to expire at the end of March 2008, was given a 3-year extension last week.

Some of the major powers and functions of the PRDC as stated in the Act is to (1) formulate policies and prepare plans aimed at promoting the development of Petroleum Resources in Sri Lanka, (2) to call for bids and assist in the evaluation of any applications received in response to such bids, received from any investor who intends to enter into Petroleum Resources Agreements in respect of defined Exploration Blocks and to determine whether the applicants fulfill the prescribed financial and technical qualifications, (3) to prepare model Petroleum Resource Agreements, (4) to assist in the negotiations being carried out, for and on behalf of the State, for agreement as to the terms to be incorporated in a Petroleum Resources Agreement and to submit the same for execution, (5) to appoint a nominee who will assist in the negotiations being carried out with a view to finalizing a Petroleum Resources Agreement, (6) to maintain registers, maps and other records in respect of all exploration blocks and areas covered by Development Licences issued under this Act, (7) to cause to be collected, compiled, analyzed and published geological, geophysical, engineering and economic data pertaining to the available petroleum resources of Sri Lanka; and to ensure the application of the law relating to intellectual property to the data so collected and (8) to cause to be collected and stored, geological samples and to permit their removal from, and return to, Sri Lanka for purposes of technical evaluations.

Also according to the Act, the 12 Committee members are to be appointed by the Minister of Petroleum and Petroleum Resources Development and includes the Secretary to the Ministry who shall be Chairman, the Secretaries to the Ministers of the Ministries in charge of power, energy, finance, environment, natural resources, fisheries ocean resources and defense. The Committee is further comprised of the Chairman of the Board of Investment, a nominee of the Ministry of the Minister in charge of Policy Development and Implementation and a nominee of the Petroleum Resources Development Minister, possessing the necessary qualifications and experience in connection with petroleum resources development. (NG)