- Transparency and clear policy key
- Need to build investor confidence
Sri Lanka’s latest inroads to offshore oil and gas exploration signals a departure from the previous chapters, with a clearly defined regulatory process in place for the first time. This development comes in the historic backdrop of resources being pushed into the spotlight multiple times with little or no progress to show for it.
According to the regulator, the Petroleum Development Authority of Sri Lanka (PDASL), based on the current data available, Sri Lanka anticipates three trillion cubic feet of natural gas and several billion barrels of crude oil from the seabed under the territorial sea and Exclusive Economic Zone (EEZ).
Sri Lanka has gained a better understanding of the seabed resource potential by a robust mapping process over the last few years. However, it is unlikely that commercial extraction of such resources will begin in the next few years, with the process of securing investment and licensing still in the early stages.
In an interview with The Sunday Morning, PDASL Chairman Saliya Wickramasuriya outlined how the regulator and the Government planned to unlock the island nation’s untapped resources and attract investment to what could become an important contributor to the crisis-hit nation’s recovery efforts.
Following are excerpts of the interview:
The topic of petroleum resources in Sri Lanka’s maritime domain has been discussed for decades with little or no progress. What has changed? How confident are you in this?
The major catalyst was the discovery of multiple working petroleum systems in 2011/’12. That confirmed the existence of hydrocarbons, at least in the Mannar Basin, and validated certain theories on hydrocarbon generation, migration, and entrapment.
Yes, not only are we confident, but the confidence we have in Sri Lanka’s potential is reflected in the fact that many international services companies or specialist data acquisition companies continue to show interest, applying and obtaining data about Sri Lanka’s petroleum exploration sector at their own cost. That indicates to us that they have confidence in the market’s interest in Sri Lanka, so that they are able to sell that data and recover their costs. I think the industry (offshore oil and gas) has a positive view of Sri Lanka’s hydrocarbon potential.
Over the years, there have been multiple efforts to survey and map Sri Lanka’s coastal resources. Can you explain where the new process will start?
Work started in the 1970s and continued to the 1980s. It was mostly focused in the coastal shallows in the area we call the Cauvery Basin around Mannar Island. The work done was fairly basic, mostly 2D seismic, and on that basis they defined subsurface structures on which they drilled seven wells. None of these seven wells penetrated hydrocarbon reserves but some of them had indications of hydrocarbons, which was a positive result for the time.
However, the reason why they didn’t penetrate hydrocarbons was because the interpretation of those subsurface structures – domes – was not accurate. They were a result of tectonic action in the area which had pushed up the base rock. In the wisdom and convention of the day, such structural highs were seen as potential traps for hydrocarbons, so that fundamental misinterpretation was what led to all seven wells being dry.
What has changed by now is mainly the format of engagement with potential investors. In the past we relied on what are known as licensing rounds or bid rounds, which are held internationally on a competitive basis, where certain areas are on offer backed by certain data on such areas. Sri Lanka has had problems with attracting interest through bid rounds.
As Sri Lanka was a virgin or greenfield province (petroleum), there was no precedent, no market set, and no connectivity at the time these bid rounds were carried out. Further, the data available at the time of the rounds was very sparse. So, there was a lot of risk involved (for potential investors) and compared to other hydrocarbon locations in the world, Sri Lanka was low on the list.
Also, Sri Lanka, as a resource sharing model, had a production contract which dictated how the state and the investor shared the resources produced. So there was a lot of risk for investors to take on based on inadequate data, which prompted some to defer decisions until further information was available, while others took their business elsewhere.
Further, until recently, Sri Lanka lacked a defined legal framework for hydrocarbon exploration. There used to be an ad hoc process, but now we have regulations for data sharing, exploration, and licensing. We have come a long way in the last few years, from a lack of policies to a national natural gas policy. We also have a new Petroleum Resources Act of 2021. Within the new framework, we have removed international competitive bid rounds and reduced the 20-year agreement period to three years (two operational, one processing) for discussion and negotiation.
In layman’s terms, what is PDASL confident about extracting from our ocean bed? How much of it is there and of what value?
The ‘basin modelling’ we have done predicts the potential for hydrocarbons to be generated, for hydrocarbons to move and get trapped at subsurface locations. The modelling also factors in a lot of risks, which are built into the estimates.
We have high confidence that we have several trillion cubic feet (TCF) of natural gas aggregate reservoir capacity. This is for the area which we have data for. The more data we have, the more accurate our model becomes. We also believe that there is significant potential for liquid hydrocarbons – crude oil and condensate. We have modelled a few billion barrels worth of that too. The basic modelling was done approximately five years ago. We now need to refine it as the data catalogue has improved.
As the regulator, is the PDASL regulatory process in line with global developments in the offshore oil and gas industry? Does the PDASL follow international best practices?
We have followed international best practices in writing the Petroleum Resources Act. It’s a good base to start with. It clearly defines roles, responsibilities, powers, and functions. It shows which party investors need to talk to, what process they have to follow to appeal, how to make change orders. It clearly states the State’s views on maintaining fiscal stability.
If an investor makes an investment on a producing field based on today’s economic conditions and a future government changes the tax rules, then their economic modelling will be affected. Therefore, the PDASL position is that if such a thing were to happen, the contract permits the production to be adjusted to maintain the original economic model.
In the current mapping process, why was there a need to change the acreage to a higher number of blocks? Is it to help allocations?
Initially, Sri Lanka had blocks which ranged in size from 3,500 sq. km to around 40,000 sq. km and that has typically been the approach in data sparse areas. This is because the consignee is allowed to maximise the data potential. This is done when there is less data.
In the position we are in today, with no petroleum activity offshore, it is quite a leap to go into a production contract from many oil and gas companies. From our point of view, we have now broken the block size down to a small area, which is only 225 sq. km each.
This is very similar to the block acreage you find in the North Sea, the Gulf of Mexico, and the Arabian Gulf. This allows the investor to better pick the area they actually want to work on. Since Sri Lanka has done seismic mapping of the larger blocks, we can afford to break them up into smaller groups. If an interested party wants data on a larger acreage, they simply have to apply for more blocks.
Generally, this is done internationally to generate petroleum-related activities. In Sri Lanka, we call it a joint study agreement. Sri Lanka also learns from this, so we partner with them.
Who owns the data on Sri Lankan territorial waters and the EEZ from the surveys and mapping that were carried out? Is there sovereign control?
The data acquired and the resources that are mapped are owned entirely by the Republic (Sri Lanka) in terms of the law. The PDASL is the regulator that manages explorational production activities so that resources can be explored, extracted, and shared between the State and the investor in such a manner that the people of this country benefit from it. Therefore, the ownership is entirely sovereign.
Can you explain the process of how Sri Lanka or the PDASL will market our resources and attract investments? What ratio of profits will Sri Lanka see?
Our programme is called ‘Explore Sri Lanka’. It sounds like a tourism promotion, but it’s about hydrocarbon exploration. What it means for the oil and gas industry is that Sri Lanka is open for hydrocarbon activity. It is not a bid round. It is an open acreage licensing programme for parties worldwide.
The objective is to increase petroleum activity around Sri Lanka to enrich our data pool. We need to improve our understanding of the subsurface (sea bed) around us and also bring in multiple parties to create a balance of technology, nationality, and experience, who will work harmoniously around Sri Lanka. The PDASL has therefore demarcated the earlier 20 blocks to 900 smaller ones.
The PDASL has already received the first order of interest on about a quarter of that acreage.
How does one engage with Sri Lanka on this? Firstly, it is an exploration licensing programme, it is not an extraction agreement – there is no commitment required for production. Secondly, one has to understand that the Government will not be spending any money on exploration. It is a speculative investment by both the data analytic companies and the oil and gas companies that buy the data and do some work during the course of the exploration, which can include a spectrum of activities from doing a study all the way to drilling a well.
If someone does drill and find hydrocarbons, since they are not under an extraction/production contract, they are required by the regulations to disclose to the PDASL immediately regarding the discovery, with a view to enter into a negotiated petroleum exploration contract. That is where the ‘State tech’ and ‘investor tech’ come into the equation. The agreement is then fiscally mapped out on the basis of project financing. We need to have a competitive fiscal regime to ensure that we secure investments over other attractive destinations.
How many Expressions of Interest (EOIs) has the PDASL received thus far and have any Requests for Proposal (RFPs) been issued? Is there a timeline to issue RFPs?
We have received about five letters expressing interest from different international oil and gas companies. They are interested in engaging in the ‘Explore Sri Lanka’ programme and they will proceed to formal EOIs when the PDASL writes back. That process is clearly defined by the regulations according to the act. Under the process, we write back to them and seek basic information as to who they are, why they have chosen Sri Lanka, what they plan to do, and where. Then we compile an RFP.
If there are multiple interests in sweet spots (blocks), the next step is to create partnerships where possible – this is a common approach in the oil and gas sector. We would encourage that. In the event we cannot agree on a partnership, we can fall back on the highest work commitment that we feel would be the most beneficial.
Now that the regulatory framework is in place, we are in a position to reply to those letters of interest. In the future, since it is not a bid round, the process will be on a first-come, first-served basis, but quarterly. Then we will send an RFP, finalising the details and awarding licences in the next quarter. Any interested party is encouraged to write to us at any time.
The licensing period we are looking at is three years, of which two are for operational purposes and the third year is for discussions, interpretation, and refinement. This is a globally used model. These regulations and models were created with international experts in the energy sector with a focus on international law and the oil and gas sector.
Will investors into the offshore oil and gas sector have a ‘one-stop shop’ process to follow or will they need to go from pillar to post with the BOI, ministries, and departments to get clearance? How will the PDASL ensure ease of doing business?
This is the exploration stage. At this stage we don’t expect there to be that level of interaction with State agencies because there won’t be any commercial collaboration other than between the operators themselves. Eventually, when extraction starts, that operator will have part of the State in partnership. When the State is a partner, the State will look into all the commitments of the State and will take care of the approvals.
The idea behind the regulations is to remove the uncertainty about how to apply for licences and how to execute a scope of work in Sri Lanka.
Has PDASL come under pressure from geopolitics when allocating blocks for exploration? What is Sri Lanka’s plan to manage geopolitical interference which will inevitably happen?
There are sensitivities that we are cognizant of, particularly the kind of operation near our maritime borders around India. One of our objectives is to partner with India to explore some of these sensitive areas. We feel that this will help remove some of the perceived risks and when we select partners for such areas, we will do so with great care. Also, having defined the process, we have made it very transparent for interested parties.
How much has the PDASL raised from surveying and sharing information? What have those funds been used for?
The PDASL generates revenue from data licensing on the blocks and services provider licensing fees. It has no stake in the actual resource, which will be under the purview of the yet-to-be-created State entity. The PDASL has sold $ 10 million worth of data over the last year. By law, that money goes to the Petroleum Fund, which is ring-fenced and part of it is annually remitted to the consolidated fund.