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‘National oil company very different to CPC’

  • It’s an upstream operations company: New PRDS DG Surath Ovitigama

 

“We should go for renewables in the future. But in the interim, we need to use gas to get there – to fund our renewable projects for when the gas eventually runs outs” PRDS Director General Surath Ovitigama

Although oil and gas exploration in Sri Lanka began in the late 1960s, it was not allowed to consistently develop due to the years of conflict and economic instability. In 2011, Cairn India, an Indian oil and gas exploration and production company, found gas deposits in the Mannar Basin – known as the M2 Block – which remained untouched since its discovery.

Last month, the Cabinet of Ministers approved drafting a new act which would convert the current Petroleum Resources Development Secretariat (PRDS) into a regulatory body that would govern the proposed national oil and gas company.

Heading these changes at the PRDS is newly appointed Director General Surath Ovitigama. With a Master’s in Mechanical Engineering from the UK and experience at one of the top three oil and gas engineering companies in the world as a senior engineer on greenfield and brownfield offshore oil and gas projects, Ovitigama spoke to The Morning about how these changes are being carried out to benefit the country’s economy.

 

Below are excerpts of the interview.

 

What changes would the PRDS undergo with the introduction of the new Petroleum Resources Act, and why is there a need for change?

The existing Act set up the PRDS as a project and it was placed under the Presidential Secretariat. In governing the PRDS, there is the Petroleum Resources Development Committee (PRDC) which is composed of senior secretaries from other ministries. So the PRDS was meant to be just a tool to execute their strategies. But over the years, the PRDC has delegated a lot of their functions to the PRDS. Yet, for big decisions we have to convene the PRDC.

When it comes to the first step of convening a PRDC, it is difficult to do so because the various secretaries have their own responsibilities as well. For example, I’ve been told that once when an investor had approached us with a project proposal, it took three years for us to get back to them due to the long process of convening a PRDC, consulting the relevant ministry, sending the information to the Cabinet, and then waiting for approval or further queries to make its way back to us. By that time, the financial partner was lost.

The oil and gas expertise of Sri Lanka resides within this office, but the decision-making is done by those who are not conversant with this industry. That’s why around 10 years ago, a new Petroleum Resources Act was proposed to restructure this sector and cut the bureaucracy. It would still protect the interests of the country but enable the decision-making by the industry experts. Currently, the new Act is with the Legal Draftsman, and once it is assessed by the Attorney General (AG), we are confident that it would come in a shape or form that we envision.

In establishing the Act, the PRDS will be established as the Petroleum Development Authority of Sri Lanka (PDASL) to be the upstream oil and gas regulator of Sri Lanka. The organisational structure will change, with a non-executive chairman and a board. We also want to ensure that at the board level, stakeholders would be involved and well informed as well. The DG position would remain like a CEO position. We would expand the organisation to bring in more regulatory and compliance functions.

But being a regulator, we can’t handle the commercial aspects of oil and gas development. That is where the proposed national upstream oil and gas company comes in. There is already a little bit of confusion about how that relates to the Ceylon Petroleum Corporation (CPC). The functions of the new company are quite different from CPC, which is Sri Lanka’s longstanding downstream oil company. The new company is an upstream operations company which looks after the commercial interests of the government in our indigenous oil and gas production. How exactly it is established is up to the Ministry of Energy – it can be a public-private partnership (PPP) or a wholly state-owned enterprise.

The third part of the industry governance triangle is policy-making, which rests with the Ministry of Energy. At the ministry-level it gives the Minister the facility to consult a committee of experts, the composition of which will change depending on the nature of the challenges that may be encountered. Securing the right expertise will require suitable compensation. There are many Sri Lankan oil and gas experts outside of the country who are willing to help, even though they may not be able to relocate back home and work full-time. We can still harness their skills and knowledge.

 

When we say a country is going to start oil and gas exploration, what does that entail?

The major oil and gas exploration and production companies have built a geological history of the world. They have a pretty good guess that there is oil and gas in Sri Lanka. But to confirm that theory, they need to explore. Usually, the first step in exploration is the geological modelling of an entire region. Sri Lanka is not where it used to be in prehistoric times; we started off near Mozambique and over time, we moved towards where we are now in the Indian Ocean.

One of the reasons why there is so much interest in Sri Lanka is that companies made some of the largest recent gas discoveries in Mozambique. The problem here was that we didn’t have appropriate laws and regulations to facilitate that investment interest, but the interest was there. Then, of course, the Cairn company actually made the discoveries in our Mannar M2 Block, confirming the geological theory.

Offshore you have to do seismic surveys to see what’s beneath the surface of the seabed. On analysis, you might start to see features that are of interest, and through decades of experience, companies know how to spot that. You then sanction a more focused and different type of survey such as 3D seismic. As the complexity goes up, the cost goes up. When there is reasonable confidence of what’s beneath the surface, you sanction drilling to bring samples up. That is exploratory drilling, which is where we are now on our M2 Block.

The next step is appraisal drilling, which is where you determine the size and properties of the discovery. Then you see whether the discovery is commercial and then you develop, conceptualise, design, and build it and start producing, after which you sell it. Until you get to that selling part, everything else is on cost. You are talking of a hundreds of millions, if not billions, of dollars’ investment. There are very few enterprises in the world that can do this. So, the laws of the country, along with the fiscal, political, policy, and security stability of the country, must all be taken into account due to the investment commitment that is involved. We call these “above-ground” conditions and if they are not good, then none of this would happen even with a commercially viable discovery.

When exploration is over, they would then enter into an agreement that details the profit share, the royalties, and how the cashflow happens during the production phase. At the moment, this is handled by us, but once the national upstream oil and gas company is set up, it would be handled by them. Until then, attracting investors, licensing them, managing them, exploring, and promoting are carried out by us. Whenever it goes into a commercial aspect, it has to leave here and that is where the new company will come in.

At present, what is the process for a company to come and explore in Sri Lanka? Is that process going to change with the new Act?

The traditional and established way around the world is to hold bid rounds. We mark different zones and invite bids to explore and develop those areas. The contracts are bonded to possible production contracts from the outset and that’s a heavy burden. Sometime back, Sri Lanka tried a two-year joint study agreement (JSA) with two giants in the industry to only explore the north eastern sea areas. That is ultra-deepwater, and it is extremely challenging.

If they make a discovery and want to take it through to production, then they will have first right of refusal (ROFR). It was carried out successfully because they found some interesting things to pursue further. However, in ultra-deep areas, it is a huge cost and given the current economic climate, they didn’t want to take the agreement further. But we now have data in that area and things to pursue with them or with another party when the time comes. So those are the two strategies used to bring companies in.

My strategy is not to focus only on one or two blocks. You shouldn’t forget about our entire offshore acreage. My challenge is to make every area an attractive investment. The more companies are here, even just for exploring, the more it gives our local service companies work, training opportunities, etc. We can engage them and use them to develop our staff, along with our universities.

 

What more do you think is needed in Sri Lanka for investments in oil and gas?

The obvious thing is the global perspective and status of the oil industry. One thing is because we are converting to gas now; whoever who produces the first gas should have a ready market. Right now, there are a lot of good initiatives going on to import LNGs (liquefied natural gas) to the country and convert our power stations to run on gas, which is exactly what we want – we need a consumer.

But while that is great, since we are hoping to develop our own gas as well, we must ensure to not commit for too long to import LNG and end up unable to develop our own resources. For that, the Ministry of Energy is co-ordinating with the Ministry of Power. It is a good co-operation, but there is always a disconnect when there are multiple agencies involved, which the Government should constantly monitor.

The National Gas Policy actually outlines this vision. It sets out how to introduce gas and talks about how to protect our indigenous resources and give them priority. The policy, towards the end, outlines the creation and implementation of the national gas utilisation master plan (GUMP). The gazette came out last week and it triggers an 18-month process to set out the master plan. That is crucial. We are going in the right direction, moving away from liquid fills and coal to gas, which is better in terms of a greener future. But, of course, gas is still a fossil fuel. Even sitting in this office, I would say we should go for renewables in the future. But in the interim, we need to use gas to get there – to fund our renewable projects for when the gas eventually runs outs.

 

What immediate benefits do you envision for Sri Lanka from this development?

Straightaway, it is the fuel import bill. Since we won’t be importing as much petroleum or coal and would be producing our own, we would be saving on the import and earning some money for our resources. The longer the production goes, the higher the government shares go up, because the investor would have recovered their cost.

Besides this is energy security which will be vital to Sri Lanka’s development goals. This would also lead to energy democracy – cheaper, reliable, and greener energy for everyone to power their daily lives. And, of course, the training and development. We have many people working in the service sector in the Middle East and elsewhere. If we have this industry, we train people in it and the next generation going out would be engineers and technicians in a well-paid industry.