• Govt. moves to attract foreign investors for Mannar Basin blocks
• Legal disputes, regulatory uncertainty, technical challenges slow progress
• New licensing push aims to revive stalled exploration; officials eyeing offshore reserves
• Fresh plans being rolled out; court cases, investor risk concerns remain key barriers

Sri Lanka is once again attempting to revive offshore oil and gas exploration after several years of stalled progress, with the Government now moving to hire a consultant to attract international investors to explore petroleum reserves believed to lie beneath its territorial waters.

In recent months, lawmakers have begun laying the groundwork for a new licensing round centred on the Mannar Basin, including the appointment of an international marketing consultant to promote exploration blocks and structure competitive bidding processes for foreign energy companies.

The initiative represents the latest effort by the State to restart upstream petroleum activity after earlier exploration programmes slowed due to high development costs, regulatory uncertainty, and legal disputes over block allocations. 

The current push comes at a time when the global energy landscape is shifting rapidly, yet the fundamental need for stable, affordable energy remains a primary driver for developing nations. Sri Lanka has long felt the impact of global price volatility, where even minor fluctuations in Brent crude prices can ripple through the local economy, affecting everything from electricity tariffs to the price of basic consumer goods.

By moving towards a self-sustaining energy model through offshore exploration, the Government states that it hopes to create a buffer against these external shocks. However, the path to becoming a petroleum-producing nation is fraught with technical, legal, and administrative hurdles that have historically derailed similar ambitions.

Framework and expertise

The process of reviving the petroleum sector begins with the strengthening of administrative oversight and the acquisition of world-class expertise. The Petroleum Development Authority of Sri Lanka (PDASL) has been tasked with spearheading this effort, but the authority has remained unresponsive to the many attempts to reach out to its members. 

To compete with other frontier basins across the globe, the State must present its offshore blocks in a manner that aligns with the expectations of major international oil companies. This requires a level of marketing and technical documentation that is currently being sourced through international tenders.

Deputy Minister of Energy Arkam Ilyas noted that the foundation must be solid before signing any major agreements. “Regarding the PDASL, we have published a tender to hire a consultant, which is currently in the evaluation stage. I have yet to check whether a selection has been finalised. We have not entered into an agreement yet. First, we require a consultant, and through them we will invite parties to express their interest. Following that process, we will select a suitable party,” he said.

One of the most critical steps in the immediate future is the appointment of an international marketing consultant to manage the upcoming licensing rounds. This consultant will be responsible for preparing the documentation, promoting the blocks to global firms, and ensuring that the bidding process meets international standards of transparency. 

Energy expert and former Chairman of the PDASL Saliya Wickramasuriya emphasised that this was not an area where the Government could afford to cut corners: “I understand that discussions are ongoing about appointing a marketing consultant to support bid documentation, marketing, and partner selection strategy. That is absolutely essential because we do not currently possess that level of expertise internally.”

Legal landscape and contractual disputes

However, the sector continues to be haunted by legal complications that have stalled progress in the past. One of the primary reasons for the lack of momentum over the last few years has been the presence of unresolved disputes regarding block allocations and the transparency of previous tender rounds. 

Ceylon Petroleum Corporation (CPC) Managing Director Dr. Mayura Neththikumarage pointed out that these legal hurdles were currently the single greatest bottleneck for the PDASL. 

“There is an ongoing court case regarding the PDASL. The case arose from a previous tender in which exploration space had been partially awarded to a particular party. That process was later closed and the party raised objections and requested that the process be halted. The matter is now before the court. I cannot provide a specific timeline to commence exploration because the progression depends entirely on the court’s schedule,” he said.

“There was a limited bid round aimed at the Cauvery Basin because the shallow waters did not require deep-water drilling technology and therefore potentially represented a quicker path to oil and gas production. One bidder submitted a bid for two blocks, which was evaluated, and the Cabinet of Ministers approved a conditional award. The time validity of the award was extended twice. However, the bidder did not fulfil the conditions, which required proof of financial and technical resources, and therefore the award lapsed. Some years later, the bidder challenged this lapse in court,” he added. 

Strategic imperatives for national energy security

The drive for domestic petroleum is a direct response to recent global vulnerabilities. The fragility of international supply chains has made total reliance on imports a dangerous strategy. Sri Lanka currently spends a significant portion of its foreign exchange reserves on fuel imports, draining resources from critical areas such as education and healthcare.

“The objective is to increase petroleum activity in and around Sri Lanka. By petroleum, I mean exploration and production, not refining, distribution, or storage. The authority’s mandate relates specifically to exploration and production, and the ultimate objective is to move towards domestic hydrocarbon production. All the groundwork carried out over the last five years, particularly from 2021 onwards, was intended to position Sri Lanka to attract the investment required to accelerate domestic oil and gas development,” Wickramasuriya explained.

The geopolitical landscape of the early 21st century has further complicated the energy outlook for the region. Tensions in the Middle East and disruptions in major shipping lanes have direct consequences for the energy bills of the country. Wickramasuriya noted that these external pressures made the quest for domestic energy more urgent than ever. 

Geological potential and the basin model

The optimism surrounding Sri Lanka’s petroleum ambitions is supported by a wealth of geological data that has been meticulously gathered over several decades. The nation possesses four main sedimentary basins: the Cauvery Basin in the north, the Mannar Basin in the west, and the South Lanka and East Lanka Basins. 

Of these, the Mannar Basin has shown the most promise, particularly following the discovery of gas by Cairn India in 2011. These discoveries, known as the Dorado and Barracuda fields, proved that a working petroleum system exists within the territorial waters of the island, even if commercial production has not yet commenced.

Geological modelling suggests that the Mannar Basin is a failed rift basin that had formed during the break-up of the Gondwana supercontinent. This tectonic history has created the ideal conditions for the formation of hydrocarbon traps. 

Subsequent data analysis using seismic surveys and well logs has led to estimates that the basin could hold up to two trillion cubic feet of natural gas. This volume, if successfully extracted, would be enough to meet the domestic energy needs of the country for decades, potentially transforming Sri Lanka into an energy exporter within the region. 

However, the geology of the Mannar Basin also presents unique challenges, particularly the presence of volcanic basalt layers that interfere with traditional imaging techniques. To overcome this, the PDASL has collaborated with international firms to utilise advanced geophysical surveys. 

These surveys have identified new geological play types, including Cretaceous reef structures and deep-water fan systems, which were not visible during earlier exploration rounds. These findings have added a new layer of technical sophistication to the State offering, providing potential investors with a much clearer picture of what lies beneath the seafloor.

Modernising data and attracting global players

The transition from geological potential to actual production requires massive amounts of capital and technical expertise that Sri Lanka simply does not possess on its own. Deep-water drilling is a high-risk, high-reward endeavour that requires specialised vessels, subsea engineering, and a complex logistical support network. Recognising this, the Government’s strategy has been to focus on gathering and packaging data to minimise the geological risk for potential investors. 

“We currently lack the technical and commercial resources, as well as the experience, to carry out meaningful exploration and production activities on our own. That expertise must come from abroad. Our objective is to attract investors who can bring capital and technical knowledge, while simultaneously developing local capacity through a gradual transfer of skills to Sri Lankans,” Wickramasuriya stated. 

To facilitate this, the PDASL has successfully marketed its data packages to global firms. By 2022, approximately $ 10 million worth of data had been sold to interested companies, providing a significant revenue stream and proving that there is substantial interest in the nation’s offshore potential. However, as Wickramasuriya noted, data sales are only the first step. 

“Companies can purchase data even before signing an exploration agreement. In fact, signing an agreement requires them to purchase the relevant data first. Over the years, we have successfully conducted numerous data sales. By 2022, we had sold approximately $ 10 million worth of data to interested companies,” he explained.

Managing above-ground risk and legislative reform

In the eyes of a multinational energy company, geological risk is only one part of the equation. Just as important is above-ground risk, which includes political stability, the clarity of the tax regime, and the reliability of the regulatory framework.

“Below-ground risk relates to the geological uncertainty regarding the presence and recoverability of oil and gas. Governments cannot control that. Above-ground risk involves political stability, fiscal regimes, taxation policies, regulatory frameworks, and geopolitical pressures. Those factors are entirely within the control of governments,” Wickramasuriya noted. 

This philosophy led to the enactment of the Petroleum Resources Act No.21 of 2021, which was designed to modernise the legal landscape of the sector. 

The 2021 act established the PDASL as a fully empowered and independent regulator, removing much of the direct political control that had characterised the previous secretariat. It also introduced fiscal stability provisions, which are essentially legal guarantees that the terms of an agreement will remain consistent throughout the life of the project. 

Wickramasuriya explained the importance of these changes: “During my tenure at the authority, our primary focus was on mitigating above-ground risks. In 2020, we introduced the National Natural Gas Policy, which was later codified through the Petroleum Resources Act. The legislation clearly defined the regulatory structure of the sector and formally established the authority as the industry regulator. It also included fiscal stability provisions to protect investors.”

Evolving strategies under recent administrations

The political transitions that have occurred in Sri Lanka in recent years have inevitably led to shifts in strategy for the petroleum sector. While the overarching goal remains the same, the methods for achieving it have been subject to review. For instance, the original timeline for a global licensing launch was delayed, allowing the current administration to review the terms and ensure they align with the national interest. 

Wickramasuriya observed that the incumbent administration had made specific changes to how exploration blocks were awarded: “Based on recent reports, the new administration has reversed the joint studies approach and reverted to the traditional model of inviting bids for long-term production contracts under 20-year production-sharing agreements,” he noted. 

While this model requires more upfront commitment from the investor, it also provides the State with a clearer path to revenue once production begins. The Government is also looking at how technological advancements can be used to make exploration more cost-effective. 

Deputy Minister Ilyas noted that the State was keeping a close watch on the latest industry trends. “Regarding offshore exploration, we are monitoring technological advancements to determine whether these activities can be conducted at a lower cost, particularly in the four basins that were previously identified,” he said. 

By utilising newer, more efficient drilling technologies and subsea monitoring systems, the Government hopes to attract investors who might have previously found the deep-water costs of the Mannar Basin to be prohibitive.

Integration with the green energy transition

While the immediate focus is on natural gas, the Government is also looking towards a future where hydrocarbons and renewables work in tandem. 

The National Natural Gas Policy explicitly identifies domestic gas as a bridge fuel – a cleaner alternative to coal and liquid fuels that can provide the stability needed to transition towards a fully renewable energy grid. Natural gas produces significantly lower carbon emissions and is an ideal partner for solar and wind power, which are inherently intermittent. 

Furthermore, the State is exploring the potential for green hydrogen production, leveraging the offshore wind resources that are often found in the same areas as the petroleum basins. The Sri Lanka National Hydrogen Roadmap outlines how the country could use offshore energy to produce hydrogen for export or domestic use. 

This dual-track approach ensures that while the nation develops its fossil fuel resources, it is not left behind in the global shift towards decarbonisation. The technical skills and marine infrastructure developed for the petroleum sector will be directly applicable to the emerging green hydrogen industry, creating a long-term industrial legacy. 

When discussing the balance between the global green energy transition and immediate domestic needs, Wickramasuriya noted that current infrastructure limited a sudden shift to renewables. “While the future is green and Sri Lanka has ample natural resources that can be harnessed to provide energy, the infrastructure required to do that on a continuous basis is not yet in place. As long as we continue to import hydrocarbons, there exists a viable business case for producing them domestically.” 

He also defended the timing of the exploration programme against international trends, pointing to the economic realities facing the country. “People often ask why we are going down this road and acting as the last country in the world to produce oil and gas when everybody else is cutting back. The reason is national security and the vulnerabilities of our own economy. We are exposed to external market fluctuations because we have to import all of our hydrocarbons. Having domestic production will cushion the impact and isolate us to a great extent from external market shocks. Having said that, the future is definitely renewable energy.”