Bids for oil exploration on hold, awaiting President’s orders
Cabinet approves licence, Cairn India to commence oil exploration before year ends

The Oil Exploration Licence awarded to Cairn India has been approved by Cabinet Petroleum Minister A. H. M. Fowzie said.

"It was submitted to the Cabinet for formalities sake so that no one can accuse the government that due process was not followed without consulting the people," he told the Island Financial Review.

Sri Lanka issued its first oil exploration licence in June when Cairn India signed the Petroleum Resources Agreement (PRA) with the government. But it was presented to the Cabinet afterwards.

According to this agreement, if commercially viable deposits of hydro carbons are found, based on the investment multiple the shares in profits will begin from 12.5 percent to Sri Lanka and increase to 60 percent within five years of commencement of oil extraction.

According to Dr Neil De Silva, Director General of the Petroleum Resources Development Secretariat, Sri Lanka’s share could reach significant proportions towards later stages of the lifetime of an oil rig.

The government expects a 10 percent royalty, apart from the profit share based on the investment multiple, taxes (currently at 15 percent) and the revenue of the participating National Oil Company which will be incorporated if and when commercial oil extraction commences.

The government received a signature bonus of US$ 1 million when the agreement is signed—a thank you for awarding Cairn India the license.

Cairn India would invest US$ 100 million to explore the Mannar Basin for commercial hydro carbon deposits in a 3,000 square kilometre block in depths ranging from 200 to 1,800 metres.

According to the PRA Cairn India will explore for oil and gas deposits with the license that is valid for eight years, broken up into three stages.

"Now that the oil exploration license has been issued Cairn should begin operations before the year ends," Fowzie said.

According to the work programme for the first phase, the Cairn would conduct its own seismic survey of 5,000 km in 2D and 1,000 km in 3D and drill three exploratory wells in the first three years.

"The exploration of oil is a risky business with no guarantees of success. There are no short cuts. Exploration must be carried out first and therefore we do not have probability ratios," Indrajit Banerjee, Executive Director and CFO, Cairn India told journalists last June.

He said that the Mannar Basin had not been explored before and was a frontier petroleum province.

"The company has been in the region for more than a decade and we have a good understanding of its geography," he said.

Cairn Lanka (Pvt) Ltd was incorporated in June as fully owned subsidy of Cairn India and will hold a 100 percent participating interest in the block.

"According to the PRA, Cairn India will undertake to engage local staff and will provide the necessary training," Fowzie said adding that Cairn India is bound by the agreement to employ resources and facilities available in Sri Lanka and can utilise resources and facilities from outside if they are unavailable in Sri Lanka.

The Sri Lankan side of the Mannar Basin is about 30,000 sq km and was divided into eight blocks. Two blocks were allocated to India and China on nomination but according to Fowzie no clear response has been given by either country.

India had earlier made a request for the block that was awarded to Cairn but the government had refused," Fowzie told the Island Financial Review in May.

He said in the same interview that bids for the remaining blocks will be called for soon and that government was expediting its efforts to call for bids on the remaining blocks. However he told journalists yesterday that the government was adopting a wait and see attitude on how best to proceed.

He told the Island Financial Review last Saturday ( 06 September) that the process of calling for tenders was on hold. He said he was awaiting a directive from the President to proceed further.

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